1. Determinants Of Product Prices
Commodities prices are afflicted with four main elements :
• Supply and demand
• Inventories and stocks
• Foreign exchange fee s
• Inflation
Supply and demand of commodities
Supply and demand is a simple idea - if availability of a commodity is lower as compared to demand,
prices rise , and if demand for an investment is lower than supply , prices fall. NOnetheless , as the
price of goods are usually set in futures markets, the price is just not impacted by today's supply and
demand , but the expected supply and demand at a future date.
A item futures contract can be an agreement to buy some a commodity at a set price at a
predetermined date. As the price commodities fluctuate, this particular protects the buyer coming
from possible rises inside commodity prices, nonetheless he also usually takes the risk that the item
price could decline and he would be spending more than the market fee. Similarly, the seller can be
protected from achievable commodity price drops and knows his / her profits in advance,
nevertheless he takes on the danger that the commodity price could go up and the man will lose
potential revenue.
The seller and the buyer of the item are both hedgers * both looking for security against possible price
fluctuations.
However, many commodity trading is done by speculators, who usually guess the cost direction and
income on the change in price , never intending to buy the product. Fewer than 3% of transactions
increase the risk for buyer of the commitment taking ownership with the commodity being exchanged.
Factors that influence supply and demand include international economic and politics events. In the
case of essential oil , as most of the Organization with the Petroleum Exporting international locations
(OPEC) members are from the Middle eastern side and Africa, if you have political instability and war
in these regions the price of oil will rise due to the estimated fall in supply. In July '08 oil prices
achieved over USD136 a new barrel following considerations about the wars inside Iraq and
Afghanistan.
We can also discover this in facts in the case of cocoa * when the president-elect with the Ivory Coast
announced an export prohibit in January next year , the price of cocoa hit a one-year higher.
However, it is not just political events that induce prices to rise. REntal destruction can cause an
difference of present supply and demand , such as Cyclone Yasi in Australia in february , which
wiped out Queensland's banana crop and later caused strawberry prices to rise to around $12 a kilo.
Stockpiles of commodities
If we continue using the example of Australia's bananas , commodity prices can be affected by the
amount individuals have stockpiled.
As bananas spoil quickly, people don't store them, which results in the interest on bananas remaining

2. powerful despite the cyclone.
However, if the commodity would be a product like wheat or coffee, which can be stored for longer
durations , there would be emergency stocks which would maintain supply, keeping costs steady over
difficult periods. That being said, in case production stops for a longer period, stocks will fall to
harmful levels, causing costs to rise to lower desire.
Foreign exchange rates and commodities
If a commodity can be traded internationally having a number of different importers, exporters and
investors, foreign currency rates can impact the actual commodity price.
If an exporter has been doing very well, this may trigger investors to invest in the area currency,
pushing the worthiness of the exporter's currency up. This means that the cash that the exporter
receives from exporting an investment can buy more in terms of imports, as its currency now has a
higher value in comparison to the currency of the country from which they are buying goods.
On the other hand, this will make the commodity they are exporting more expensive for many who
want to import the idea , as the importers need to convert their money in to the currency of the
transferring country to make the investment.
As the exporter's currency continues to rise, the idea becomes more difficult for the actual importers
to buy the actual commodity. This will cause the actual importers to lower their desire , meaning that if
the exporters continue producing exactly the same amount they will have a great over-supply. Either
the actual commodity price will need to drop, or the degree of supply will have to decline to get supply
and demand last balance.
Inflation and commodities
Let's assume that offer and demand are in balance, stockpiles are well-managed and the foreign
currency rate remains static. But inflation proceeds rising at 2% per annum.
This means that the price of commodities will also have to increase by 2% a year. The strawberry
farmer has to elevate his prices by 2% a year due to the fact his cost of living can be rising by 2% a
year. But consumers can afford to pay this particular because not only are their costs regarding living
rising by 2% a year, however incomes are also growing.
Closing thoughts
Although several different factors influence item prices, most of them in some way impact supply and
demand, thus , making this the main factor to evaluate when determining market place sentiment and
selecting whether to enter or exit the market.
whats the price of gold