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What Factors Determine Commodity Prices?

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  • Written By: Dana DeCecco
  • Edited By: A. Joseph
  • Last Modified Date: 11 September 2016
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Commodity prices are influenced by the economic laws of supply and demand. Conversely, supply and demand are influenced by commodity prices. High prices will precipitate a greater supply, and a greater supply will tend to lower prices. Lower prices will bring about a greater demand, which will tend to increase prices. Commodity prices also can be influenced by things such as political events, weather conditions, natural disasters and even public perception.

The forces of supply and demand create an equilibrium. Price discovery is a continuous process of determining the price of an asset. Buyers and sellers enter bids and offers respectively. This procedure is implemented on a commodity exchange. The exchange enforces rules and regulations for the trading of commodities.

This process of negotiation determines the price of a particular commodity. Open outcry is the term used for trading commodities in the auction pits of futures exchanges. This type of trading has been enhanced by electronic trading methods. The electronic trading of commodities is carried out on trading platforms provided by futures brokers. Bids and offers are constantly changing throughout market hours.

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The responsiveness of commodity prices to the forces of supply and demand is known as elasticity. Elastic commodities in general are commodities that have a substitute. The demand for a commodity is inelastic when the price does not necessarily affect the demand. Coffee might be considered an elastic commodity. If the price is too high, for example, people might choose to drink tea.

Oil might be considered an inelastic commodity. It is the primary source of fuel for cars and trucks. Demand for oil does not change much in comparison to the price of oil. There is a limit, of course, of how high a price the consumer is willing or able to pay. At some point, alternate fuel sources might be provided.

Commodity prices also can be influenced by political events, such as civil unrest or war. Oil prices can be escalated by these factors. Higher oil prices lead to higher fuel prices, which might lead to higher transportation costs for nearly all commodities. Prices can be influenced by actual events or perceived events.

Agricultural commodity prices can be affected by weather conditions. A drought can affect the price of corn, which in turn can affect the price of cattle that corn is used to feed. The price of a particular commodity might affect the price of another. A low production of corn can increase corn prices, which in turn causes feed prices to increase. The final result might be higher prices at the grocery store.

Commodity price indexes were created to track the performance of commodities within certain sectors. Broadly grouped categories include agriculture, energy and metals. Online resources are available to track and chart various commodity indexes.

Many countries export commodities that are natural resources or are produced in their region. The cost of shipping, handling and storage might affect the price of these commodities. Production costs such as labor and equipment will affect prices. Even government regulations will affect some commodity prices. The complexities of supply and demand along with other factors influencing commodity prices make it difficult to predict future commodity prices.

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What is the role of price in a free competition market?

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