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Ask the Analysts: What factors influence the price of a commodity?

posted on July 22, 2014


What factors influence the price of a commodity? In each Ask the Analyst segment, experienced commodity market analysts provide thoughtful insight on trading skills, price trends, and strategies to help students and producers better understand how the markets work.

What factors influence the price of a commodity?

Roose: Various ones depending on the commodity. Grains, for example, hugely dominated by weather, more than any other commodity. Probably 80% of the grain market movement ultimately turns out to be weather. You either do or don't get a good crop depending on the weather. So, that is from that standpoint. From the livestock standpoint, is probably profitability, would be the dominant one. And then also the consumption. Do we lose the consumer if prices move up too high? If we go down too low do they consume too much?

Robinson: There can be policy issues. Regulation and policy is a big factor I think in price discovery these days. Geopolitical tensions come into play. 

Blohm: The global marketplace from the standpoint of what crazy person in the world is behaving even crazier. It's global economic factors. What is happening in China matters. What is happening in Europe matters. The fact that Europe is probably going to use their monetary policy very soon absolutely affects what is happening here. And there's probably seven or eight things that you just have to be aware of at all the times. And at any one time one of those activities can just trump everything. And just when you think you're so smart and you know what you're doing this one goofy thing comes out of the way and then you're just humbled. 

Roach: Supply and demand does not buy and sell, people buy and sell. And as a consequence it is an emotional kind of a market where people are making decisions based on what their beliefs are and what they think the supply and demand is rather than what those numbers really are. 

Martin: Well, definitely it's the demand side. If you have great demand, even if you've got a good supply and you have super good demand running tandem, then all of a sudden you can't afford to have any glitches. So, that is one thing. Also, I would say psychology, just the trade psychology. 

Newsom: It's numerous. There's no way to pinpoint any one thing. That's why I believe in chaos there. You never know what that one factor is going to be. And usually the factor is something we don't even know. If I was going to pull one out of the hat for the grain industry it has to be weather. Weather sets the tone for how people are trading the market and then everything else feeds off of that. 

Gold: Internationally as we export more and more of our products around the world, the international picture and what is grown internationally certainly affects the market. The bean market is going to be affected by South American production. The wheat market is going to be affected by European wheat growth, Russian wheat, Argentinean, Australian. So, wheat is probably more of a world market than any of them. 

Pfitzenmaier: I don't know, I still tend to look at the fundamentals of the market and supply and demand and talk to farmers and that's, again, I go back to it again, talking to the people with their money on the line is really, really important I think because they have their minds keen on what's going on and they don't, and none of them like to lose money. So, they're careful and I think they're wise a lot of them. 

 

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