What are the Factors that Affect Commodity Markets?

What are the Factors that Affect Commodity Markets?

Numerous factors impact the price range of commodities that are traded in the world market. Due to the massive volume of commodities traded daily, the commodities market is the world’s second largest market, second to the currency market. There are countless factors that impact the price fluctuations in the commodities market, primarily based upon supply and demand. A few other general factors are discussed below.

Weather conditions

When you consider that a large portion of commodities traded in the world market are agricultural goods, the weather plays a significant role in the price of such goods. Dramatic climatic changes directly impact the production and availability of food products, which drives the commodity price up or down accordingly.

For example, American states that produce corn can have their crops adversely affected by hurricanes. As a result, there will be shortages in the amount of corn produced, leading to price increases.

Extreme winter conditions increase the demand for heating oil, which is derived from crude. When winters are bitter or long-lasting, there is usually a significant increase in crude prices as the demand for heating oil increases.

International tensions

The economic and political relationships between the countries producing the commodities and those consuming them, directly affect the movement in prices. The obvious current example of the effect of the Ukraine crisis is the anticipated increase in the cost to Europe and to Russia), of cutting off the supply of natural gas to Europe that has flowed from Russia through Ukraine to Europe. It should also be noted that any drastic change in government policies affecting importing and exporting will significantly affect commodity prices. Any time an import duty is increased or trade is restrained, the price of the commodity is increased to account for the change. This is also true for times of war, inflation and seasonal variations.

When Libya, the producer of 2% of the world’s oil, experienced civil war it contributed to a rise in the price of crude from $84 a barrel to approximately $125 a barrel. If the present issues surrounding Russia’s Crimean adventure continue to unfold with aggressive stances on both sides of the conflict, Europe is likely to experience a rise (some experts predict a sharp rise) in its costs for natural gas purchases.

Inflation is coming

With a number of countries printing money in efforts to artificially stimulate their economies, keeping interest rates artificially low, and currently printing money, the time is certainly coming when inflation will rise bringing higher commodity prices in markets for commodities where the supply remains stable or decreases. The prices of precious metals, such as gold and silver, are impacted by the value of world currencies, especially the US dollar and the Euro. When the value of the dollar is perceived as decreasing, investors move at least a portion of their portfolios to precious metals as a safe haven for trading, resulting in the demand for and the price of those metals to rise.

Production and technology matters

The ability or inability to produce, deliver and store commodities is an important factor upon price. As technologies and tools are developed to improve the effectiveness of these factors, fluctuations in price will occur. Land use changes, crop diseases and labor patterns also play a significant role in the price of agricultural commodities.  The spectacular growth of smart phone and other electronics production has substantially increased the demand for rare earth metals, commodities for which China has the largest supply by far.  The proposed Tesla battery factory is also expected to impact commodity prices.

Commodities are capital-intensive goods that are impacted by a wide variety of factors. These factors directly influence the cost of producing the commodity, translate into higher prices for the products in which the commodities are used when supplies are limited or demand surges.  The increasing world population, the upward economic movement of substantial segments of that increased population and the attendant increase in demand for consumer goods portend a significant increase in commodity prices as economies cycle back to sustained growth.

If you have any questions about commodities or would like to discuss other   corporate, securities and investment banking matters, please contact me, Dan Breacher, or the Scarinci Hollenbeck attorney with whom you work.