What makes something a commodity: Why commodities matter, and how their markets grew

4.1 A shrinking share of output, an indispensable input

Development shrinks the primary sector. Kuznets's estimates, reproduced by Radetzki and Wårell, put US agriculture and mining at 22 per cent of GDP around 1870 and 5 per cent around 1960; in the UK the share fell from 41 to 13 per cent between about 1905 and 1950. In 2017 agriculture, mining and utilities were 4 per cent of GDP in the United States and Japan, 13 per cent in China and 22 per cent in India. Norway, rich and resource-heavy at 22 per cent, is the exception.

The mechanism is rising productivity: labour and capital move from raw materials into manufacturing and then services, towards goods of ever higher value per kilogram. But the small share hides a hard dependence. Radetzki and Wårell compare commodities to a glass of water, of little account in normal times and priceless in the desert. And because poorer countries pass through a material-intensive stage, world demand can surge while rich-country use stagnates. Between 1990 and 2005 China's use of aluminium, nickel and copper rose six- to eightfold, and by 2018 China took 52 per cent of world copper, 51 per cent of coal, 49 per cent of nickel and 46 per cent of tin.

Commodities were almost half of world goods trade in 1965 and 27.8 per cent in 2018, when fuels alone were 12.4 per cent. In 2016-18, exports of oil and oil products averaged 1,114.5 billion dollars a year, far more than the 738 billion for passenger cars. Iron and steel came next at 396.5 billion, then natural gas at 217.6 billion, precious stones at 105.3 billion, copper at 61.0 billion and coffee at 39.0 billion. Tilton and Guzmán's 2014 estimates reach down to germanium at 314 million dollars and arsenic at 30 million.

• Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 18-23, 44-47, 61-62, 147
• Tilton & Guzmán (2016), Mineral Economics and Policy · pdf pp. 20-27

4.2 Commodity dependence: when one export is most of an economy

Radetzki and Wårell call a country a monoeconomy when its leading non-fuel commodity exceeds 40 per cent of its exports. In 2013-17 seventeen qualified, all poor and small: Botswana's precious stones were 85 per cent of exports, Mali's gold 68, Zambia's copper 67, São Tomé and Príncipe's cocoa 67 and Malawi's tobacco 48. Eight oil exporters had oil above 80 per cent, including Iraq at 97, Angola at 96 and Nigeria at 81.

The core problem is instability. Radetzki and Wårell's worked example: if the leading commodity is 60 per cent of exports and exports are 25 per cent of GDP, a doubling of its price adds export revenue worth 15 per cent of GDP, and a fall back removes about 13 per cent. Each oil shock of the 1970s raised the OECD's import bill by only 2 to 3 per cent of GDP. Agreements to stabilise the prices of tin, coffee, cocoa, sugar, rubber and wheat all failed; Radetzki and Wårell see the deepest flaw in not knowing which equilibrium price to defend.

Booms bring Dutch disease. A booming export draws in labour and capital, raises the prices of non-traded goods and the real exchange rate, and squeezes other exporters. Nigeria was self-sufficient in food before the 1970s; the oil boom overvalued its currency, farm exports withered and food imports rose, and the oil price collapses of 1986 and 2014 forced painful adjustment. Harding and Venables, cited by Radetzki and Wårell, find each extra dollar of resource exports goes with about 75 cents less of other exports.

Whether resources curse growth is unsettled; results depend on the period and measure chosen. Erten and Ocampo take the long view, finding four super-cycles in real commodity prices between 1865 and 2009, each 30 to 40 years long, with the mean of each non-oil cycle generally lower than the last. That supports the Prebisch-Singer view that commodity prices drift down relative to manufactures.

• Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 267-276, 288-294
• Erten & Ocampo (2012), Super-cycles of commodity prices, UN DESA WP 110 web ↗ · pdf pp. 1, 3-4

4.3 A short history: from rice brokers to Brent

Forward trading is old. Blas and Farchy note that Japanese rice brokers traded futures as early as 1697, in what is believed to be the world's first futures exchange. Geman counts more than 1,600 US exchanges founded in the second half of the nineteenth century. Morgan describes the chaos before Chicago's Board of Trade opened in 1848: after harvest there was sometimes so much grain that it was dumped into Lake Michigan, and shortages followed. Futures spread sales through the year at a guaranteed price, which rewarded storage, and a public price made cheating farmers harder. Abuse followed: in 1888 B. P. Hutchison cornered wheat during a crop disaster and the price doubled to two dollars a bushel in a week.

Metals followed. The London Metal Exchange opened in 1877, yet for much of the twentieth century aluminium, nickel and molybdenum, and copper, lead and zinc in North America, sold at producer prices. As producers multiplied in the 1970s and 1980s pricing moved to exchanges; aluminium and nickel joined the LME in 1979, cobalt and molybdenum in 2010.

Oil shows the full arc. Yergin describes exchanges in Titusville and Oil City trading spot and futures oil from the early 1870s, until Standard Oil took control of the industry. Blas and Farchy describe the Seven Sisters' share of international oil trade falling from 90 to 42 per cent in the 1970s, with cargoes trading in Rotterdam far from OPEC's official prices. On 30 March 1983 Nymex, recovering from scandals over its Maine potato contract, launched crude futures on West Texas Intermediate delivered at Cushing. Brent became the reference for crudes from the Middle East, Russia, Africa and Latin America, with a London futures contract from 1988.

Radetzki and Wårell frame the century as a fifty-year wave of state intervention, from the early 1930s to about 1980, followed by retreat to markets. Trading has since moved east: in the first half of 2019 over 40 per cent of futures and options contracts traded in the Asia-Pacific region.

• Blas & Farchy (2021), The World for Sale · pdf pp. 63, 100-102, 112
• Geman (2005), Commodities and Commodity Derivatives · pdf pp. 21, 23
• Morgan (1979), Merchants of Grain · pdf pp. 97-99
• Tilton & Guzmán (2016), Mineral Economics and Policy · pdf p. 97
• Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 30, 121, 143, 148, 151
• Yergin (1991), The Prize · pdf pp. 37, 1247-1250

See it in the table

Check your understanding

In Radetzki and Wårell's example, the leading commodity is 60 per cent of exports and exports are 25 per cent of GDP. If its price doubles, the extra export revenue equals about what share of GDP?

What did the 1848 Chicago Board of Trade and its futures contracts do for the grain market, according to Morgan?

What was the main institutional consequence of the 1985 tin crisis?