How can one monitor the price swing of commodities and the factors that influence price volatility?

Commodity pricing has many sticky components but in general, the instability of prices and the randomness that comes with it increases the cost of doing business for producers and traders.

Cocoa futures for example have plummeted 12 percent in less than a minute and then recovered in from the “flash crash” but left everyone perplexed. Also, cotton futures can swing wildly tripping market circuit-breakers on many occasions over a trading year. Sugar is another commodity were futures can fall 20 percent in a couple days and then recover.

Just like commodities, food manufacturers and fuel suppliers, need market futures to help them set prices and predict point of delivery costs that can vary from corn flakes to cakes. As a result, farmers use the same information to decide which crops to plant. This interdependent process keeps industries running smoothly and act as insurance policies to hedge the risks inherent in buying and selling raw commodities.

But when prices move unpredictably, it increases the cost of buying the futures and options that protect companies against such changes. The added costs find their way to the grocery store and to the shopping mall for shopping consumers.

A good example of the benefit of the futures market is heating oil. Typically a distributor buys oil only as he needs to supply it, he uses heating oil futures and options as a form of insurance to protect himself against unexpected jumps in prices. However, seven or eight years ago, such protection added only 2 to 6 cents to each gallon of heating oil the distributor bought. But volatile oil prices mean it can costs him 37 cents a gallon for such hedging which is an extra cost to add to customers’ heating oil bill for a given year that can also swing wildly the following year.

Nonetheless, volatility can drive prices down as quickly as it pushes them up. A wide range of commodities can plunge, with the broad CRB commodities index closing up or down 5 percent. Moreover, the situation is more confusing for businesses as commodities have become more volatile for reasons that no one fully understands.

Much such fluctuation is caused by economic supply and demand, especially, when stocks of commodities like cotton, corn and coffee are driven to low levels, setting markets on a hair trigger. As demand for many commodities rises in developing countries like China and India that are becoming wealthier buying ever more food and oil that increases demand and puts pressure of existing stocks.

It follows that other factors are purely financial, like concerns with a weak dollar, oil disruptions on the supply side and a changing perception of the global economy, can also have influence on rapidly changing prices.

Hedge funds and commodity traders have become a massive force in the commodities futures market, in part by a switching to computerized trading. Critics say the technological switch is altering the dynamics of the commodities markets, just as it has in the stock market, which has suffered several “flash crashes” as well.

Traditional players like grain elevators or cotton merchants are being outshined by a new class of financial speculators, including high-frequency traders, who use automated programs to buy and sell repeatedly at high speeds.

“The exchanges, which profit from the increased trading levels, say high-frequency trading now makes up 10 to 20 percent of the futures trading in many agricultural commodities, nearly a quarter of the trading in metals and 30 percent in energy futures markets.”

One important issue to consider is that commodity trading is the purest form of investing. Unlike the stock market there’s no derivation, no abstraction, no three or more levels of separation from the underlying asset. There is a tangible utility like a grain a foodstuff, a fuel in a huge market with numerous players. Commodity pricing is as close as the real world gets to the classical economic concept of a good’s supply and demand curves intersecting at a particular price and quantity.

Changes in supply, not demand, is what dictates most price movements with regard to a particular commodity. But supply is contingent to various ecological factors, consumption patterns and finances that go beyond the control of the people who raise a commodity for a living.

Cocoa for instance is produced far from the world’s financial and trading centers, primarily in the Ivory Coast, Ghana and Latin America, in lots of small-scale family farmers. The effect of having many suppliers offering a uniform product means that each individual supplier has little influence on the market price. In contrast another commodity like gold with an annual production averaging 2,500 tons has a small variation in a comparable period unless great uncertainty sets in the world markets including kinetic war or a trade war making world currencies become volatile.

Karl Marx thought that the amount of labor involved in creating a good determined its value, however, cocoa farmers don’t work five times harder when their product is sold for $4,000 a ton than when it is sold for $800 per ton. An investor knows this, and by extension knows that the only way to earn money in the commodities market is to anticipate price movements. Which is easy to say but very difficult to do and that explains why conservative investors put their money in mutual funds and exchange-traded funds (ETFs).

The Chicago Board of Trade (CBOT) where CME Group is the world’s leading and most diverse derivatives marketplace, made up of four exchanges, CME, CBOT, NYMEX and COMEX. These exchanges are very good reference for monitoring price swings on daily trades as well as futures market.

Why are major European economies not on the same level of trade deficit with Japan like the US is?

http://www.worldstopexports.com/japans-top-import-partners/

Trade deficits can be a good or bad for an economy, but trade surpluses can also be a good or a bad sign. Even a trade balance of zero meaning that a nation is neither a net borrower nor lender in the international economy can be either positive or negative.

Components of a National Account Balance

· Goods

· Services

· Income receipts and payments

· Unilateral transfers

In the past it was common to track the physical items that were transported by air, ocean or ground between countries as a way of measuring the balance of trade. This measurement is called the merchandise trade balance. In most high-developed economies, goods make up less than half of a country’s total production, while services compose more than half. The last two decades have seen a surge in international trade in services, fueled by technological innovation in telecommunications and computers that made it possible to export or import services like telephone answering service, financial, law, advertising, management consulting, software, construction engineering, and product design among others. Most world trade still is in the form of goods rather than services, and the merchandise trade balance is still posted by governments and reported by newspapers. In economic analysis, however, one must rely on broader measures such as the balance of trade or the current account balance which includes other international flows of capital and foreign aid.

Overall trade in services is still relatively small compared to trade in goods, the importance of services has expanded substantially over the last few decades.

In reference to the third component of the current account balance, labeled “income payments,” it accounts for the money received by U.S. financial investors on their foreign investments and payments to foreign investors who had invested their funds in the U.S. The reason for including this money on foreign investment in the total measure of trade, along with goods and services, is that, from an economic perspective, income is just another economic transaction as equivalent to the shipments of cars or wheat or any other commodity.

The last item of the current account balance is the unilateral transfers of funds, which are payments made by government, private charities, or individuals where money is sent abroad without any link to merchandise or service. Foreign aid or military assistance to other countries qualifies in this category, as does it spending for charities of poverty or social programs.

When a person from the United States spends money overseas, it is also counted in this category. The current account balance considers these unilateral payments as imports, because they involved a stream of payments leaving the country.

Public opinion regarding trade deficits and surpluses might change if we the review the labels if for instance a trade deficit is called obtaining foreign direct investment and trade surplus renamed investing abroad the negative connotations of labels can be dispensed with. The relationships between trade flows of merchandise, services and flows of international payments must be clearly understood because these relationships are about the causes, benefits, and risks of different kinds of trade balances.

For example the United States exports 14% of GDP while Germany exports about 50% of its GDP.

What are the consequences?

It indicates that Germany has a higher level of trade than the United States whilst the United States has a large domestic economy so its internal trade is voluminous. As a result a large economy tends to have lower levels of international trade and it has little impact on its trade imbalance. Moreover, an imbalance between domestic investment by government and private sector contrasted with national saving will always lead to a trade imbalance, but has little to do with the level of trade.