Determinants Of Product Prices


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Determinants Of Product Prices

  1. 1. Determinants Of Product PricesCommodities prices are afflicted with four main elements :• Supply and demand• Inventories and stocks• Foreign exchange fee s• InflationSupply and demand of commoditiesSupply 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 theprice of goods are usually set in futures markets, the price is just not impacted by todays supply anddemand , 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 apredetermined date. As the price commodities fluctuate, this particular protects the buyer comingfrom possible rises inside commodity prices, nonetheless he also usually takes the risk that the itemprice could decline and he would be spending more than the market fee. Similarly, the seller can beprotected 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 losepotential revenue.The seller and the buyer of the item are both hedgers * both looking for security against possible pricefluctuations.However, many commodity trading is done by speculators, who usually guess the cost direction andincome on the change in price , never intending to buy the product. Fewer than 3% of transactionsincrease 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 thecase 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 warin these regions the price of oil will rise due to the estimated fall in supply. In July 08 oil pricesachieved over USD136 a new barrel following considerations about the wars inside Iraq andAfghanistan.We can also discover this in facts in the case of cocoa * when the president-elect with the Ivory Coastannounced 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 andifference of present supply and demand , such as Cyclone Yasi in Australia in february , whichwiped out Queenslands banana crop and later caused strawberry prices to rise to around $12 a kilo.Stockpiles of commoditiesIf we continue using the example of Australias bananas , commodity prices can be affected by theamount individuals have stockpiled.As bananas spoil quickly, people dont store them, which results in the interest on bananas remaining
  2. 2. powerful despite the cyclone.However, if the commodity would be a product like wheat or coffee, which can be stored for longerdurations , there would be emergency stocks which would maintain supply, keeping costs steady overdifficult periods. That being said, in case production stops for a longer period, stocks will fall toharmful levels, causing costs to rise to lower desire.Foreign exchange rates and commoditiesIf a commodity can be traded internationally having a number of different importers, exporters andinvestors, 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 exporters currency up. This means that the cash that the exporterreceives from exporting an investment can buy more in terms of imports, as its currency now has ahigher 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 whowant to import the idea , as the importers need to convert their money in to the currency of thetransferring country to make the investment.As the exporters currency continues to rise, the idea becomes more difficult for the actual importersto buy the actual commodity. This will cause the actual importers to lower their desire , meaning that ifthe exporters continue producing exactly the same amount they will have a great over-supply. Eitherthe actual commodity price will need to drop, or the degree of supply will have to decline to get supplyand demand last balance.Inflation and commoditiesLets assume that offer and demand are in balance, stockpiles are well-managed and the foreigncurrency 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 strawberryfarmer has to elevate his prices by 2% a year due to the fact his cost of living can be rising by 2% ayear. But consumers can afford to pay this particular because not only are their costs regarding livingrising by 2% a year, however incomes are also growing.Closing thoughtsAlthough several different factors influence item prices, most of them in some way impact supply anddemand, thus , making this the main factor to evaluate when determining market place sentiment andselecting whether to enter or exit the market.whats the price of gold