Other than demand factors affecting commodity prices, supply is an equally important part of the equation investors need to look at.
Here are some common reasons for a shortage or increase supply of a commodity:
Especially true for agricultural products, the weather patterns can wreak havoc on the production cycle of these agricultural commodities.
This can be a weather phenomenon such as the monsoon or El Niño, which is a weather pattern that causes an abnormal warming of the sea, resulting in extreme weather conditions.
While drought is usually the main threat to food production, El Niño can also cause heavy rains, flooding or extremely hot or cold weather.
While the immediate impact is the destruction of plantations and agriculture, it can also cause animal diseases, plant pests and forest fires.Imagine an extremely dry weather condition during the corn planting season in the U.S., the main corn producer in the world.
While you may not eat corn on a daily basis, it is used in many sub-ingredients found in many of the foods you find in the supermarket that uses High Fructose Corn Syrup.
If the entire crop is badly affected by weather patterns, you can imagine that not only will the price of corn increases, but the increased cost may also be passed down the supply chain to other food products that use it as an ingredient as well.
2) Costs Of Storage And Transportation
Many types of commodities require storage in warehouses and transportation services to bring them from source to factories or end-users.
Be it an edible commodity or metals that are used for construction purposes, most require storage prior to distribution.
This means that inventory and storage costs can have an impact on the prices of these commodities, especially if they are stored for a long time.
3) Government/Trade Group Policies
If you’ve been following the oil story and its phenomenal price drop in 2016, you’d know that one of the reasons for the huge drop in prices has been the increased supply.
For one, the U.S. domestic production has nearly doubled in the last few years and traditional oil-producing countries like Saudi Arabia that used to supply oil to the U.S. had to drop their prices.
Other countries such as Canada and Iraq has also increased their supplies, causing an overall production increase globally.
What’s worse is that the OPEC, a cartel of major oil producers, have refused to cut oil production despite calls from oil-producing countries. This has of course impacted the fall of oil prices.
4) Price Of OilMany of us may be surprised that oil takes up a major production cost of producing many other commodities, even inedible agriculture.
This is why an overall drop in oil price will actually cause the price of other commodities to fall, as production costs are reduced and may encourage more planting.
This is especially true in the mining sector as well, where energy consumption is extremely high and it makes up a huge part of the production cost.