Factors that Affect Commodity Prices

Physical commodity prices are influenced by supply and demand. Unlike financial assets, the value of commodities is also affected by attributes such as physical quality and location.

Commodity supply is a function of production. Supply may be reduced if problems with production or delivery occur, such as crop failures or labor disputes. In some commodities, seasonal variations of supply and demand are usual and shortages are not uncommon.

Demand for commodities may be affected if final consumers are able to obtain substitutes at a lower cost. There may also be major shifts in consumer taste over the long term if there are supply or cost issues. Commodity traders are sensitive to the inclination of certain commodity prices to vary according to the stage of the economic cycle. For example, base metals prices may rise late in the economic cycle as a result of increased economic demand and expansion. Prices of these commodities are monitored as a form of leading indicator.

Commodity prices may be affected by a number of factors, including:

• Expected levels of inflation, particularly for precious metals

• Interest rates

• Exchange rates, depending on how prices are determined

• General economic conditions

• Costs of production and ability to deliver to buyers

• Availability of substitutes and shifts in taste and consumption Patterns

• Weather, particularly for agricultural commodities and energy

• Political stability, particularly for energy and precious metals