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Capital and Natural Resource Markets

6. Natural Resource Market

Commodity markets are exchanges that trade in primary rather than manufactured products.

Learning Objectives

Define the natural resource market

Key Takeaways

Key Points
  • There are two types of commodities. Hard commodities are mined and soft commodities are agricultural products.
  • There are approximately 50 commodity markets worldwide. In general, these markets deal in purely financial transactions instead of outright purchases of goods. These financial transactions are known as financial derivatives.
  • In the United States, the principal regulator of commodity and futures markets is the Commodity Futures Trading Commission (CFTC). The National Futures Association (NFA) formed in 1976 and is the futures industry's self-regulatory organization.

Key Terms
  • commodity: Raw materials, agricultural and other primary products as objects of large-scale trading in specialized exchanges.

Natural resources are a fundamental part of the production process, as these goods make up the basis of any manufactured product. Most natural resources that are used can be acquired through the open market or through private deals. Below are some methods of acquiring different natural resources for production.


Public Goods

Some natural resources that are components of the production process are not sold, but are public goods. Public goods, like air and riverways, are non-excludable and non-rivalrous. This means that anyone can use these goods without paying a fee, and if one person uses the good it does not limit the ability of another to use the good.

As time has progressed, people have learned that some means of use of public goods in production processes can degrade certain natural resources. For example, pollution is a result of production processes that can foul the public goods of air and waterways. To combat this, governments have begun to impose ecotaxes on producers that use processes that pollute or otherwise dilute public goods. While not a market, these taxes are essentially a fee charged to producers for using public natural resources and can make the production process more expensive.


Commodity Markets

Commodity markets are exchanges that trade in primary rather than manufactured products. Not all commodities are natural resources, and not all natural resources are commodities, but commodity markets remain an important source for many resources. There are two types of commodities:


Chicago Mercantile Exchange: The Chicago Mercantile Exchange, shown above, is one of the world's largest commodity markets.

  • Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar;
  • Hard commodities are mined, such as gold, rubber and oil.

Commodity markets are heavily regulated. In the United States, the principal regulator of commodity and futures markets is the Commodity Futures Trading Commission (CFTC). The National Futures Association (NFA) formed in 1976 and is the futures industry's self-regulatory organization. The NFA's first regulatory operations began in 1982 and fall under the Commodity Exchange Act of the Commodity Futures Trading Commission Act.

In Europe, commodity markets are regulated by the European Securities and Markets Authority (Esma), based in Paris and formed in 2011. Esma sets position limits on commodity derivatives.


Closed Purchases

Not all natural resources can be acquired on commodity markets. Some must be acquired through direct purchases without the use of an intermediary clearing house. One example is for land. Land is one of the three factors of production, can be used to mine other natural resources and is absolutely necessary if a person wants to have a "brick and mortar" location where they can sell their goods. Land cannot be acquired through a commodity market, but must be obtained through an agreement with someone who owns the land. A person can either purchase the land outright or become a tenant of the person who owns the property.

The challenge of this process is that for these closed deals, the producer has to find the resource that they need, determine who owns it, and then negotiate with that person to obtain the resource. These costs can make these natural resources more expensive.