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Factors that Affect Commodity Prices

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Commodities are very important since they are the essential factors in the production of other products. A wide variety of commodities exist like coffee, wheat, barley, gold, and oil. These commodities are constantly traded around the world in different exchanges like the Chicago Mercantile Exchange, Winnipeg Commodities Exchange, Online Stock Brokers and New York Mercantile Exchange.

In this article, we will talk about the factors that affect commodity price movements. If you’re planning to take a shot at commodity trading, this article is for you. Read on.

Production

Commodities are capital-intensive products, meaning they are affected by natural factors such as weather conditions, crop diseases, size of land cultivated, and factors related to production like labor patterns, development in the tools and technologies used.

Other than these there are factors like the economic and political landscape that manifests itself as a form of trade constraints, subsidies, and taxes, among others. Working altogether, these factors influence the cost of producing the commodity and the demand for it in a market where there is always more than one participant.

Storage and Transportation Constraints

All commodities sport a real physical form and thus there is a need for a good storage before the distribution. This is very much unlike financial products that do not really require physical storage. This factor does not, however, affect the prices across all types of commodity assets in the same magnitude. It is, in fact, dependent on the type of commodity in question.

Economy and Demand Patterns

In recent times, the uncertainties in the world financial systems have made commodities an ideal investment to Financial Brokerage Company instruments. Two of the most typical examples are gold and silver. The increasing involvement of emerging markets as suppliers expose the prices to the political and production related constraints like economic policy, infrastructure, and labor conditions. This oftentimes pushes the prices higher.

Seasonality

Some examples of this factor include weather-related patterns, operational risks, climatic conditions, and politics.

A comparison of Commodities

Gold

Storage costs are low due to their increased durability. There is a lease rate implied in practice and there are two possible situations:  direct ownership and a synthetic long position. Direct ownership means that there is no cost of leasing but storage cost is involved. A synthetic long position, on the other hand, means that there are no storage costs but there’s credit risk exposure.

Corn

This is an agricultural commodity that is easily perishable and therefore highly susceptible to seasonal factors like harvests and yearly weather conditions. These are directly affected by the storage costs and supply factors.

Natural Gas

Demand for gas is higher in winter than in any other seasons. In addition, the transportation and the storage costs are higher than most other types of commodities.

Agricultural products rely more on supply side instead of the demand changes as compared to gas, which is affected more by the demand for it rather than the supply side factors.

Electricity

Supply side factors such as the demographic of land and distribution of population, availability of natural resources, political, economic environment , and trade policies, and type of economy largely have an influence on the price and availability of this commodity.

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