Seasonal Effect on Commodity Prices
Many things in nature are reoccurring. Reoccurring events in nature are often referred to as seasonal. There are so many factors that affect the prices of commodity like demand and supply in the market, the prices of other commodities, natural causes, geopolitical conditions etc. Despite all these factors season is one major factor that affects the commodity prices and demand to trade in agro commodities; one should understand their seasonal and off-seasonal movements at national and international levels. Seasonal and off seasonal movements include the supply and demand in the peak season and off-season. Usually in peak season, supply would increase and so price declines. In off-season, supply would decline and hence price increases. Beside this, you need to consider the international demand and supply and seasonal changes because if you take a specific commodity, the production period may be different in various producing countries.
Some commodities are produced only for a few months in a year. But their demand continues in the whole year or some commodities always available but there are fluctuations in prices or quantities that are synchronized with the season or time of year. Some futures contracts are based on annually produced commodities like corn, wheat, soybeans, cotton, etc. An annually produced commodity tends to have supply available at one time (harvest) while demand is variable, and segmented throughout the year. Other futures contracts are based on a market with variable production cycles, and more constant demand components like Petroleum Products (Crude Oil, Heating Oil), Metals (Gold, Silver, Platinum), etc
So investor should always keep in mind seasonal fluctuation in commodity prices before investing.
Now the question is what are the sources of seasonal fluctuations in prices or quantities of commodity? There are main sources like (1) Demand and Supply and (2) Climate. which effect the fluctuation in prices.
Demand and supply is the major factor which effect the prices of commodity There may be waves in the market that are about a yearlong. The prices of soybeans, oil and meal are mainly determined by the supply and demand characteristics. In CBOT soyabean prices rose to more than double in current year from last one year due to strong demand and supply squeeze. As we can see the seasonal effect in the sugar market because prices of sugar increases from mid of August due to festival seasons.
On the demand side, we have natural gas. In summer natural gas is only used for cooking. But in winter natural gas is burned for heating fuel also. This results in higher natural gas prices in winter. The principal method is to buy gas in the off-season and store it for winter use. If gas is put in storage in the summer and withdrawn in the winter, the cost of gas charged to consumers in the winter will be a blend of the current market price and the cost incurred when buying in the summer. This blending tends to have a limiting effect on the price volatility to some extent. It is far from perfect insulation, however. When natural gas prices rise or fall dramatically, consumers will still see noticeable changes in their gas rates.
If we talk about maize, the season of bird flu is having a cascading effect on several poultry-related sectors. Due to the outbreak of bird flu, the demand for maize from the industry goes down and in turn decline in prices is seen.
The another main reason for these seasonal variations is climate. Changes in climate and the cycle of seasons throughout the year can affect the supply of some commodities (e.g. fresh fruits and vegetables), or the demand for them (e.g. coal, winter and summer clothing). Crops, despite the major advances in agribusiness in recent years, are still dependent upon climatic conditions. In fact; seasonal fluctuations are present in almost all sectors of most economies.
Floods and droughts affect food production both in terms of quantities and in terms of relative composition of the food basket. Major negative impact could be seen in the production of rice, wheat, maize and soya, all major consumption items globally. Calendar events can also create seasonal commodities. Climate change has a tremendous influence on commodity prices. Like floods in the corn belt in the US have had a significant impact on corn prices in recent times.
For example: Maize prices are seasonal in nature. From the seasonal indices graph shown below, we can see that maize prices go down during the month of September and October because of arrival pressure in the market. As arrivals start diminishing, prices show a recovery from the post-harvest decline during the April-June months.
As we can see that the Hurricane season has disrupted energy firms along the Gulf of Mexico – which accounts for a quarter of US oil production and 15% of natural gas production. The sector is still reeling from the impact of Hurricane. According to the federal Minerals Management Service 98 percent of crude oil production and 94 percent of the natural gas production in the Gulf of Mexico was shut down at the well because of the storm. In preparation for Ike, four Gulf coast refineries have shut down operations, accounting for 6.7 percent of the nation’s capacity. That has helped crude oil continue its slide from its record high of $147.90 a barrel on 11th July 2008. This is the effect on oil prices due to climate change.
Conclusion
Certain goods are demanded in particular seasons. Anyone who invests in the commodity market must take the seasonal phenomenon into account. So before investing in commodity market, investor should always consider season of that particular commodity in which investor wants to invest. If Investor wishes to trade on a seasonal basis, then it is advisable to diversify with a large spectrum of markets. For example, a seasonal investor may wish to establish a portfolio consisting of Unleaded Gasoline, Soybean Meal, Live Cattle by choosing at least one market from each of the major groups of commodities, a particular event will not disrupt the behavior of all markets. Commodity can be sold during the season with profit and when it becomes out of season the commodities is either not sold or even if sold it is sold at loss.
