Agricultural commodity trading is a lucrative endeavour. However, like any commodity its producers and investors face challenges. Market forces can combine to both boost and hinder growth within the agricultural sector. Understanding how agricultural prices are set and changed by these market forces is essential in maximising trading profits and future proofing against critical upcoming challenges.
Given the importance of understanding what drives agricultural prices for traders, in this article we are going to explore exactly just that, with specific focus on both the increasing and decreasing of agricultural commodity value within volatile markets and its connection to supply and demand.
Understanding that Commodity Prices Change
When trading in any commodity, it is foolish to not appreciate that every asset has a level of market price variability. Indeed, many traders make their profit from understanding that the price of their commodity will go up and down and then up again over time. Profits can be made by selecting the opportune moment to sell those commodities when at their most desirable.
In fact, desirability is at the core of all commodity fluctuation. When a commodity is popular in demand, producers can afford to charge higher prices and also ship in higher volume. When a commodity is not in demand, this can lead to disappointing surpluses where perishable commodities, such as those found within the agricultural sector, can go to waste.
By understanding the variability in agricultural prices and what drives them, traders and investors can negotiate upcoming difficulties more readily, while growing their businesses through strategic and opportune production output.
But what exactly causes an agricultural commodity to increase or decrease?
What Increases Agricultural Commodity Prices?
Central to any commodity price fluctuation is the concept of supply and demand. In research by the Deutsche Bank, it has been found that rising prices of agricultural commodities are particularly caused by demand outstripping supply. There are a number of reasons why demand for agricultural commodities continues to rise. Some of these include:
- Demand for bio fuels
- Population growth
- Increased wages throughout some regions
- Increased number of people eating plant based diets
- Continued demand for meat based products, especially when agricultural land and crops are required to fully mature farmed animals ethically.
- Developing countries adopting westernised mass farming practices
All these are growth indexes where human behaviour and demand is pushing for more agricultural products. At the same time, there are downward trajectories and trends which in actual fact boost demand also. This is because these trends limit the supply meaning that the demand cannot be met. Whenever the demand for a product far outstrips the supply, prices inevitably rise as people are willing to pay more for access.
Some of these downward trends include:
- Water shortages
- Climate change
- Political instability
- Unjust distribution of land
- Failing infrastructure to handle increased demands.
Rampant price increases, however, are not desirable even for traders. Such trends can result in niche markets collapsing with the population moving over to other commodities such as developing technologies in lab grown food and insect ingredients as a source of protein. From an ethical standpoint, something which Kimon EOOD is acutely aware of, when agricultural produce is priced so high that people cannot afford it this leads to malnutrition and even starvation as a result.
From this perspective then, the importance of having a balanced agricultural commodity marketplace where traders are making good products with a good profit margin but not at the expense of food production, should be the achievable goal for most agricultural producers. This results in a more stable commodity price without any wild fluctuations, which in turn allows producers to plan more accurately for future business endeavours.
What Lowers Agricultural Commodity Prices?
When you look at what lowers agricultural commodity prices then, we can see that they are often the antithesis of what increases agricultural commodity prices. First, when supply vastly outstrips demand, agricultural producers are forced to lower their prices so much so that profits are negligible. It can also mean that agricultural products, specifically food ingredients, go to waste. This is an unpalatable situation when many people are still starving around the world.
Recent reforms in how agricultural commodities are traded have helped to bring liquidity to the market which allows sellers and buyers to encounter each other more readily. These are changes which KIMON EOOD heartily supports, which will encourage other agricultural commodity traders to operate in an ethical, sustainable manner. This is better for the planet and better for business. It also means that the future looks bright for agricultural commodity traders.
The Sky is the Limit for Agricultural Commodities
If there is one truth in life, it is that people must eat. For this reason there will always be ample demand for agricultural products, but a nuanced and informed approach to trading and supply chain management is required to create the right environment so that producers are growing and consumers are healthily consuming.
For more information about what drives agricultural commodity prices and how to get your agricultural commodity from origination to sale effectively, contact one of our trained experts today.