The price of each commodity is set through open market trading at commodity exchanges. At these exchanges, the price of a particular quantity of each commodity is established. The exchanges ensure that each contract provides a standardised minimum amount of the product at a standardised minimum quality. An example of this is corn, which is generally sold through contracts that deliver 5000 bushels of grade 2 or higher quality. This helps to ensure fair trading.
The price action of each commodity is registered and recorded on commodity price charts. These typically are presented in the form of bar charts where the daily prices of commodity contracts are presented as a vertical bar. The top of the line denotes the highest price for a contract of that commodity for that trading day, and the bottom of the line denotes the lowest price. These lines, when built up over the course of days, weeks or months, begin to depict trends in the pricing of each commodity.
Also representative of trends in the commodities markets in both a general sense and for specific subsets of commodities (such as livestock) are commodity price indexes. A commodity price index is a weighted average of selected commodity prices at a particular time. This helps potential traders and investors to study foresighted trends in the market, and assess the value to cost ratio of a particular commodity.
The most important and relevant feature to understand about the price of any particular commodity is that it is fluid in nature, and is influenced by a huge number of factors. One of the most obvious factors that affects commodity prices is that of supply and demand. Supply is a result of, and function of, production, and thus supply is reduced if there are problems in the production. Adverse weather conditions may, for example, cause a lower yield of a particular crop (for example, canola), which decreases supply. Similarly demand affects commodity prices in that it may change due to a cheaper alternative product being available to consumers. In this event, the price for which a quantity of the commodity could sell would decrease. If these supply issues continue over time, then demand may also be decreased as consumers look elsewhere for replacement products, which again will affect the commodity price.
There are other factors that can affect commodity prices. Weather, as previously mentioned, can have either a beneficial or an adverse effect on agricultural commodities and energy commodities. The exchange rate between the various currencies can also determine how prices are set, as can the expected levels of inflation. This is particularly true for precious metal commodities like palladium. Political and socio-economic factors can also come into play, as exemplified by the price of oil during the Gulf war in Iraq. While the war continued, the prices of oil fluctuated wildly depending on opinions of whether Saddam Hussein was adequately equipped to maintain control of Iraq’s oil supplies. The price of oil can also be affected, for example, by the time of year with demand, and thus price, often increasing in the summer.
The degree to which any of these factors influences commodities prices is obviously dependent on the nature of that specific commodity, but no commodity is exempt from the fluidic tendencies that characterise the market.