Various factors can affect the prices of commodities and contribute to the fluctuations.
Competition: The introduction of better technologies, higher quality products can reduce the demand for an older commodity.
Weather: Extreme weather conditions can impact the harvest and production and thereby affect the prices of the commodities.
Supply & Demand: A balance between the demand and supply is crucial to ensure a stable commodities market.
A booming economy can lead to increased demand with increase in prices whereas a weak economy can lower the demand for commodities.
Factors like production rate, seasonality, taxes, trade laws, can also affect the prices of commodities.
What is meant by Commodities Futures?
In commodities futures you enter into an agreement with an investor based on the future price of a commodity.
For example, you might agree in a commodity futures contract to buy 5,000 barrels of oil at $50 a barrel in 30 days. At the end of the contract, you do not take delivery of the physical goods, but you close your contract and take an opposite position as a seller through the spot trading market. So, in this example, when the futures contract reaches its expiration date, you would close out the position by entering another contract to sell 5,000 barrels of oil at the current market price.
If the spot price ends up higher than your contract’s price of $50 a barrel, you would make a profit, and if it is lower, you would lose money.