Prices of agricultural and energy commodities are governed by the free market. In practice, it follows the logic of supply and demand, always adapting to global monetary policy. There are many factors that affect the value of these commodities, which in turn makes them subject to constant fluctuations and uncertainties.

In this scenario, combining knowledge and risk management strategies is crucial to prevent exchange rate fluctuations that occur in a short period of time, usually due to climatic and market factors, as well as other conjunctures. With hEDGEpoint, you gain security through effective hedging products, in addition to valuable analysis and insights to help make assertive decisions.

Continue reading to understand how commodity prices are defined, who the parties involved in the global chain are, and why risk management is essential to protect the businesses involved in this ever-changing market.

How are prices set?

 Commodities are standardized, with low added value, and produced by different producers. Since they’re commercialized worldwide, supply and demand are virtually inelastic. They can be classified according to their origin:

• Agricultural: In general, they’re raw materials from agribusiness, such as soy, corn, cotton, coffee, wheat, meat, and sugar.
• Minerals: They include ores, minerals, metals, and energy-related resources. The best known are iron, gold, iron ore, oil, and natural gas.
• Environmental: They’re the natural resources that produce other goods and are fundamental for industry, such as water and wood.
• Financial: There are numerous currencies and public securities such as the Euro, the Dollar, and the Brazilian Real itself.

Traded all over the planet, commodities have prices that depend on global production and consumption chains, based on product prices found on international commodity and futures exchanges. The main reference is the Chicago Stock Exchange (CBOT) in the United States. It also comprises the U.S. CME, NYMEX, and COMEX exchanges. The union between them has made the Chicago Stock Exchange a global reference in price formation.

Among the main assets traded on this exchange, agricultural commodities stand out, particularly grain contracts such as corn and soybeans. In addition, there are cattle and oilseed contract operations. It’s also the world’s largest energy market, employing contracts for natural gas, biofuels, refined products, electricity, and others. Lastly, it carries out highly liquid metal contract operations, such as gold, silver, copper, and platinum.

Each commodity has its own market specificities. Although they have the CBOT as a reference, they’re also influenced by other stock exchanges. In the case of corn, the relationship between international prices is not always so precise, as high domestic demand causes shifts in price behavior. The same happens with wheat. In South America: it’s more regionalized within Mercosur, which is why countries like Argentina and Uruguay can directly affect values.

What other factors affect commodity prices?

• Sum of export premium: It’s the highest value that the importer can pay for a commodity, determined through negotiations between exporters and importers, and connects the value on the Chicago Stock Exchange to the local market. This calculation takes place based on the price of the derivative placed in the crushing industry of the country of destination, in terms of equivalent grain. The costs of delivering the product to the industry from the place of origin are deducted.

• Deduction of export and freight expenses: These include port expenses, brokerage fees, and commissions involved in marketing. Freight, on the other hand, is the cost to transport the commodity from the producing region to the exporting port, whatever the chosen mode. The cost of shipping varies between regions, so prices are different as well.

Factors that influence daily price variation

As oscilações diárias dos preços acontecem, principalmente, devido a fatores deslocadores de oferta e demanda, como dados de produção e área plantada, reservas, questões climáticas, crescimento ou recessão econômica, abertura de novos mercados, desafios sanitários, dentre outros.

Daily price fluctuations are mainly due to shifts in supply and demand factors, such as production data and planted areas, reserves, climate issues, economic growth or recession, opening of new markets, and sanitary challenges, among others.

Agricultural commodities, for example, undergo price changes depending on “phytosanitary factors” such as the presence of pests. They’re also subject to rainfall, which significantly impacts production. In Rio Grande do Sul, the May 2023 soybean harvest was impacted by excessive rainfall at the beginning of the month. This caused natural threshing and high discount rates due to damaged grains. When there’s a drought or natural phenomena such as El Niño, there may also be changes in commodity values.

Logistics is another inherent factor, especially in relation to transport, whether by road, rail, or waterway. If it becomes more difficult or more expensive, due to an increase in fuel prices for example, there’s the chance of an increase in commodity prices.

Sociopolitical conflicts also influence pricing. These are known as external factors, such as when a country stops exporting or importing to another due to diplomatic issues. This is what’s still happening with the Ukraine war: Western countries have continued to reduce gas imports from Russia.

Why is this? When commodity stocks exceed demand, the price tends to fall. In periods in which demand is greater than supply, the tendency is for its value to increase. If supply is greater than demand, prices fall; and if demand is greater than supply, prices rise.

hEDGEpoint puts together knowledge and strategy to manage risk

Risk management is crucial to minimize the impacts of price variations in agricultural and energy commodities, ensuring greater predictability and security in the future. As you can clearly see, there are numerous factors that impact these volatile markets: weather, political and economic changes at a global level can all be quite unpredictable.

hEDGEpoint combines expert knowledge in diverse commodities and regions of the globe, providing you the best experience in futures and options trading. In this way, we provide access to the world’s main markets and futures exchanges in an easy, efficient, and quick way.

With transparency and a complete understanding of your business, hEDGEpoint offers access to strategies that allow you to cover and manage your financial risks. We also provide access to exchange rate fixing along with the commodity, in a unified and integrated manner.

Talk to a hEDGEpoint specialist today and find out how to use these tools to better protect your business.