Are futures markets and trading activity in commodities needed?  That’s an interesting question.  One professor, adamantly underscored to my class during my undergraduate years that derivatives were “tools for mass destruction.”  If we take even a transient dive into history, we can see claim after claim during the mid-1850s when traders were financially and legally penalized for having anything to do with futures trading.  In order to answer the question properly, it is prominent for us to first accept the wants and needs in our economy today.  The fast-paced society of trading, online shopping, giving attention on social media plays a role in the speed at which is expected to exchange value.  Even so, let us try to answer the question from the past, present, and future point of view.  I firmly believe that the futures markets were needed in the past, are needed now, and will always be needed as long as society is able to survive and thrive on our planet.

Why were the futures markets needed in the past?  The history of the futures markets starts back to the 1100s, in which the Counts of Champagne in France took on the lettre de faire.  This stood for a “ticket” to exchange a commodity with the same value as another commodity.  The Counts of Champagne had an opportunity to gain experience due to the historic downfall of Rome, followed by England’s slow growth in feudal times.  Certain traders would travel to the Counts of Champagne to trade.  The need for the futures markets back then saved tremendous amounts of time “mental accounting,” both for different members in society.  In Japan during the 1730s, “rice tickets” were exchanged, which were called “cho-ai-mai”, in which certain individuals who were due payment for tenants were given not the Japanese currency, but gladly accepted instead a 1% share of the rice.  The hidden benefit for this?  Those who received the cho-ai-mai in the form of “future food” also would have at least the certainty that they would either receive food or be owned food if an unexpected famine were to occur.  Famines did not always take place annually, but the possibility of experiencing a complete dearth of food for a protracted time was certainly enough to entice the landlords to “buy into” the first developmental stages of the futures markets.  Thus, the futures markets provided both a level of convenience for two sides of traders, as well as provided a “promise” of food, which provided an increasing level of both security, standard of living regardless of the economy, and trust for both parties.

Let us fast forward past the evolution of the futures markets and focus on the markets today. Why the need for futures markets now? The futures markets allowed for speculators, hedgers, and arbitrageurs to fulfill a partial need in their level of trying to maximize their standard of living. Futures markets, which are regulated now more than ever, help investment management firms and hedge funds to hedge against risk, especially in a particular sector.  Not all commodities are in high demand if we were to try to identify and trade them in the futures markets.  Butter, lard, and potatoes are a few of the several goods which have lost favor in futures, while crude oil, gold and silver, and coffee and cocoa are in high demand and are watched daily in the financial markets.  The greatest reason that the futures markets is needed is that large firms and hedge funds are willing and able to buy large sums of these commodities.  As these commodities are traded and marked-to-market, which means their prices are tracked and adjusted daily, these hedge funds and large firms have enough assets to neutralize their position buy shorting their long positions or longing their short positions.  Despite the greed and fear that is apparent in the financial markets, it is better to have traders do so by the Commodity Trading Futures Commission (CFTC) than by the market that revolves around shadow banking.

Why are the futures markets needed in the future?  Whether we like to admit it or not, we live in a global society that offers different abundant goods, while a dearth of goods are elsewhere.  As we live in a world with advanced technology, the opportunity to travel on a credit card to pay back the debt later, or to learn how to trade the futures markets in our own rooms, the needs and wants for society are expected to have greater expectations.  It is relatively wise to expect that the speed of our societal demands, instant gratification, and the needs within our geographic region that are lacking particular products such as coffee are expected to be traded or purchased, either digitally or physically in large quantities.  Despite the growth in both electric and hybrid vehicles in the last decade, Gasoline is still one of the most inelastic goods today.

The futures markets are needed, whether we focus on the past, present, or future.  It is a wise projection to expect that the futures markets are not just here to stay, but will continue to incrementally evolve.  With the CFTC regulating the futures markets, this allows large firms and hedge funds to trade on the exchange, which will keep individuals and organizations from doing business in the world of shadow banking.  Finally, the futures markets help the world experience a partial degree of knowing that although they do not have the option to cancel a futures buy or sell order, they do have the option, if financial assets are available, to “neutralize” the futures trade by doubling the order on the other side.