Y1 40) Primary Commodities Price Volatility - Causes and Consequences

Summary

This video explores the volatility of primary commodity prices, explaining why they can swing dramatically due to inelastic supply and demand. Agricultural products, metals, and energy sources like oil are all affected by factors such as weather, global growth, and production lags. The script highlights how fluctuations in prices impact producers' revenues, government income, and economic stability, especially in developing countries. It warns that falling prices can lead to reduced investments, higher production costs, and potential shortages, while rising prices benefit producers but may also exacerbate volatility. The consequences of these price swings are significant and often negative for both producers and economies.

Takeaways

• 😀 Primary commodities are essential materials for economic activity, including agricultural products, metals, and utilities like oil and gas.
• 😀 Prices of primary commodities are highly volatile due to price inelastic demand and supply, meaning changes in price can be extreme.
• 😀 Demand for primary commodities is inelastic because they are necessities with few substitutes available.
• 😀 The supply of primary commodities is also inelastic due to long production lags, such as the time required to plant crops or extract metals.
• 😀 Agricultural commodities are perishable, and other commodities like metals and oil are costly to store, leading to low stocks and high volatility.
• 😀 Price volatility arises from regular shifts in demand and supply due to factors like weather and global economic growth.
• 😀 Weather events such as floods or droughts can significantly shift the supply curve of agricultural products, leading to price swings.
• 😀 Changes in global growth influence demand for primary commodities; high growth boosts demand, while slowdowns reduce it.
• 😀 When prices of primary commodities rise, producers benefit from higher revenues due to inelastic demand.
• 😀 Price drops are a major concern for producers, leading to reduced income, profitability, and potential poverty, especially in developing countries.
• 😀 Price volatility can discourage investment in production, holding back productivity and reducing competitiveness over time.

Q & A

What are primary commodities?

Primary commodities are essential materials for economic activity. They include agricultural products like fruits, vegetables, wheat, rice, sugar, and maize, as well as metals such as nickel, copper, zinc, aluminum, and steel, and even utilities like oil and gas.

Why are the prices of primary commodities so volatile?

The prices of primary commodities are volatile because both supply and demand are price inelastic. Demand is price inelastic because many commodities are necessities with few substitutes, while supply is also price inelastic due to production lags and the difficulty in storing these commodities.

What does price inelastic demand mean for primary commodities?

Price inelastic demand means that changes in price do not significantly affect the quantity demanded. This is because many primary commodities are essential, and there are few or no substitutes available for them.

What is the impact of supply inelasticity on primary commodities?

Supply inelasticity means that the quantity supplied of primary commodities does not easily adjust to price changes. This is because production involves long lead times, such as planting and growing crops or extracting metals and oil, and there are challenges in storing many of these commodities.

How does weather impact the supply of agricultural commodities?

Weather plays a major role in determining the supply of agricultural commodities. Good weather leads to a bumper crop, increasing supply, while bad weather like floods or droughts can reduce supply by damaging crops.

How does global growth affect the demand for primary commodities?

Global growth significantly influences the demand for primary commodities. When global growth is high, there is increased demand for commodities in manufacturing. Conversely, a slowdown in global growth leads to a reduction in demand.

What happens to the price of primary commodities when supply shifts due to weather changes?

When supply shifts due to weather changes, such as a bumper crop (good weather) or a poor crop (bad weather), the price can swing significantly. A supply increase typically lowers the price, while a supply decrease raises the price.

What are the consequences of falling prices for producers of primary commodities?

Falling prices lead to lower revenue for producers, which can reduce their income, profitability, and living standards. In extreme cases, producers may leave the industry or go out of business, potentially causing shortages and supply concerns.

How do falling prices affect government revenue in countries dependent on primary commodities?

When prices fall, government revenue from taxes and shares in commodity production declines. This can have a negative impact on economic growth, particularly in countries that rely heavily on primary commodity exports.

Why is price volatility a concern for the investment in primary commodity production?

Price volatility discourages investment in primary commodity production because producers may not be willing to invest in capital, machinery, or productivity improvements if they are uncertain about future prices. This can lead to high production costs and lower competitiveness over time.