Commodities trading is the buying and selling of raw goods and materials. It is a type of trading that has been existing since the early times. Wheat, corn and coffee are traded. Eggs, meat and poultry are traded. Energy sources and metals also are! These are just some of the numerous commodities in the world.
Compared to other types of trading though, commodities trading can be very difficult as commodities are volatile. There are unavoidable occasions when the market becomes hard to predict. Let’s look at 4 crucial factors that move the prices of commodities. Understand why they happen and how they affect the industry of commodities trading.
1 – Supply and Demand
Number one on the list and actually the most influential factor of all. Supply and demand go hand in hand. They affect each other. They affect the commodities market.
In Economics, it is studied that the price of a certain commodity is based on its available quantity and highly dependent on the consumers’ demand. The price will go up as the people’s demand for the product goes up and also when the supply falls. Meanwhile, the prices will go down as the demand goes down and also when the supply rises. These are the fundamental rules and reality in the law of supply and demand. Nonetheless, there could be some changes, too, depending on the buyers’ response; like if they think that there’s a cheaper option, they will not buy, so demand will decrease and supply will decrease.
Because commodities are used everyday by people all over the world, supply and demand indeed move the prices of commodities in a very crucial and impactful way. No other factor can move the commodities market the way supply and demand does!
2 – Weather Conditions
Commodities’ prices are affected by weather conditions. Shifts in weather fit or alter the production, harvest and transportation of commodities. Particularly when there are storms, rain or snow, the process of acquisition and shipment of goods will be dictated. When the production or output gets halted or becomes lacking due to bad weather, prices can soar.
3 – Seasonality
Seasonality is commonly based on changes in supply and demand. Since the availability of raw goods depends on their length of growing, seasonality surely affects commodities’ prices. This factor makes the market predictable in some ways since experts, traders and common people know how supply of goods changes as the seasons change weekly, month, yearly.
4 – Geopolitics
Commodities are imported and exported to and from different parts of the globe. Countries share many commodities with each other. For that reason, geopolitics can definitely move their prices.
Say there are political conflicts existing between two regions or countries where commodities are derived. The prices can drastically change. If the issue is really serious, production and transportation of certain commodities might be restricted. That would cause grave problems and price hikes, even in countries not involved in the conflict. Geographical borders, trade policies and war treaties can manipulate them.
MOVING UP AND DOWN
Compared to other trading types, commodities trading seems easier to join in because the market is moved by factors that everyone is familiar with and is aware of. What’s more, materials traded themselves are things that people mostly use daily. This industry does not seem as complicated as others. Nevertheless, a commodities trader must always be smart, wise and watchful, while taking all the drivers of commodities’ prices seriously and proficiently.
All these factors have significant influence over commodities, thus affecting how the prices move as well. The next time you trade commodities, take these details into consideration. Understanding them will allow you to trade wisely and profit advantageously.
About the Author
Nicole Ann Pore is a writer, an events host and a voice over artist. Quality and well-researched writing is her worthwhile avenue to enlighten and delight others about things that matter. She is a daytime writer for FP Markets, one of the leading forex brokers in the world. Nicole graduated Cum Laude from De La Salle University Manila, Philippines with a Bachelor’s Degree in Communication Arts.