Macro Factors Affecting The Price Of A Commodity

Unlike Equity or Debt markets, Commodity markets are very different and are affected by various demand and supply factors.

Demand Factors:

1.Own price of the commodity – The price of a commodity is inversely related to its demand. As price rises, only the richer class of society can afford that product, leading to a decrease in demand for that product, and vice-versa.

2.Price of Related Commodity – Related commodities are of two types: -

3.The income of Consumers – Demand generally increases when a consumer’s income or expectation of their future income increases, and vice –versa.

Supply Factors:

1.Price of Commodity – The price of a commodity is positively related to its supply, i.e., when supply goes up, prices of that commodity rises, and vice – versa.

2.Technology Used - Technological changes can influence the supply of a commodity. Using advanced technologies can increase the supply of that commodity, and vice-versa. Using better technologies can also reduce the cost of production of that product.

3.Cost of Production –The lower is the cost of production of a product, the more profit a producer enjoys. Higher are the profits, more is the supply and vice- versa.

4.Weather and Seasonality –  Bad weather situations in a country can lead to a decrease in the supply of that commodity. It is seen that supply of a commodity is high during a season, for example, a mango is in high supply from the month of May to September, and less supply during the rest of the year.

The following image depicts the supply of a commodity. As we can see the supply of mango is low in the month of January and as September approaches, the supply of mangoes reaches its peak. This cycle repeats every year.

5.Government Policies – Unfavourable policies of a government can have adverse effects on the supply of a commodity, whereas, favourable situations can lead to an increase in the supply of a commodity.