Commodity Price Movements
Supply & Demand
A commodity is a type of good for which a supply-and-demand chain exists that spans various countries. Commodities can drastically range in type from agricultural products, like corn and cotton, to precious metals, such as gold, silver, and copper, and solid and liquid minerals, such as gas. Goods such as these are bought and sold on a daily basis not only between nations, but also between traders on the commodities exchange market. When nations buy or sell a commodity, a physical transfer of goods takes place in exchange for money. When traders buy and sell commodities in trading sessions, no goods are actually exchanged; the exchange rather takes place over the perceived value of the commodity at any given time.
Commodities do not have a fixed predetermined price, and the trading of commodities hinges on the price variations of a given commodity. Price variations occur according to changes in the demand and supply of a product. When a commodity is in high demand but the supply does not suffice to cover all needs, the price of the commodity will rise. Conversely, when demand falls below supply levels and producers are faced with the risk of having to store excess production, the price of the commodity falls in an attempt to have more of it circulate it in the market.
There are many factors that affect the demand and supply of a commodity and their relative changes to one another forms the basis of commodity price movements.
Weather affects mostly agricultural products. A hurricane, for example, that devastates the corn fields of America and diminishes corn output will send corn prices sky-high, affecting everyone who uses the raw material from ethanol producers to sugary-drink manufacturers.
Seasonal variations can alter demand levels for certain products. The onset of winter, for example, signifies increased demand for heating oil which is derived from crude oil.
Market conditions also affect the prices of commodities significantly. During the 2009 U.S. financial crisis, demand for crude oil fell dramatically as people curbed excess spending, taking oil prices down with it as well.
Political and economic conditions in big importers or exporters of goods also have a big impact on commodities. In the recent economic instability experienced in the U.S. in October 2013, the price of gold fluctuated just as much as the American dollar, as investors wavered between investing in the U.S. dollar and taking refuge in the inherent value of gold.
Regulatory changes on the exchange of goods from various countries and organisations can have direct effects on the market’s trading condition. The Kimberly Certification Process implemented by the United Nations in 2003 to prevent ‘conflict diamonds’ from entering the market has restricted the global supply of diamonds.
Technology usually affects the supply end of the trading line as technological improvements result in faster and larger annual yields in many fields from agricultural production to precious metal mining.
Human demographics also play an important role in the price of commodities as a lack of workers, for example, can stall operations and hamper supply lines.