Understanding how commodity prices are determined is one of the first steps to joining the interesting and never dull world of commodity trading. There are a great many factors, but for the most part supply and demand determine commodity prices. Commodities are the goods and services exchanged during commerce. When both the buyers and sellers reach a market price agreement that price is called the “equilibrium price” or “point of balance.” Every day while commodity exchanges are open, prices change as buyers and sellers bid, ask, buy and sell.
Commodity Prices Explained
There is not much difference between a commodity originating from one producer and the same commodity from another producer; i.e., a barrel of oil is considered the same regardless of the producer. Usually buying and selling commodities is carried out through commodity futures contracts.
Commodities can be traded on a variety of exchanges around the world:
Chicago Mercantile Exchange (CME)
New York Mercantile Exchange (NYMEX) (including the merged New York Commodities Exchange (COMEX)
Chicago Board of Trade (CBOT)
Winnipeg Commodities Exchange (WCE)
Intercontinental Exchange (ICE)
Kansas City Board of Trade
Different Types of Commodities
Traditional commodities are gold, grain, beef, natural gas, oil, as well as recently added financial products like foreign currencies, bandwidth and cell phone minutes. There are sub-class commodities also: metals (sub-precious metals, gold, silver, platinum), agriculture (sub-grain, livestock), energy (sub-gas, oil).
Commodity Prices Are Determined By The Law of Supply and Demand
When there is not enough product to meet the demand of buyers, the shortage creates higher commodity prices. When product supplies increase and there is no longer a shortage issue, then commodity prices will go down.
However, commodity prices are not always quite that simply set. Even when an equilibrium price between a majority of buyers and sellers has been reached, there will always be those who are unwilling to pay the set commodity price. They will want to pay less. If certain producers raise or hold steady their demand price, there is always a chance that a competitor will be willing to lower the price. Therefore, a majority of agreement is what creates the equilibrium price.
If there is a change in supply or demand the price will change – example, if a year’s corn crop creates a surplus, corn will go down; on the other hand, a drought will cause commodity prices to rise. A surplus of a commodity will cause the producers to want to clear their inventories and therefore they will lower prices. Trends and consumer favorites can change, also creating commodity price movement. Interruption of manufacturing can also move prices along with whims and needs of consumers. Wars and rumors of political unrest and disasters of all natures can change commodity prices.
Economists use commodity prices, especially food and fuel, to forecast inflationary readings.
Commodity trading is not for everyone, but if you are diligent with your homework, there is no reason you cannot be successful. Hopefully you gained some insight into exactly how commodity prices are determined and perhaps you’ll take a look at this exciting market
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