Commodity markets contribute to the stabilization of their price: futures contracts allow suppliers to block the price they will receive for their product at a future date (the price is also fixed for the buyer).
The determining factors of these prices are:
Offer and demand.
Its value reflects the reality of each raw material in the short – medium term, unlike financial assets, which reflect longer term expectations.
Moment of the cycle.
They tend to have a good performance in economic recoveries and in the high points, while their behavior is worse when the deceleration begins.
Political and economic factors.
If we think about oil, for example, political instability in the Middle East means that its price often fluctuates as a result of uncertainty in supply.
In the case of agricultural products, it is very clear. A poor harvest will result in a lower supply, with the consequent upward pressure on prices (related to the first factor, supply-demand binomial).
Generally, raw materials are quoted in dollars and move in the opposite direction to that of this currency. When the dollar rises, it exerts a downward pressure on the prices of raw materials
In the derivatives markets for commodities (commodities), for each commodity there are usually different open contracts with different maturities. Depending on whether the risk premium is positive or negative, the time structure of each commodity will have a positive or negative slope.
A market Spot pricing (positive slope) reflects the normal market situation. Future prices exceed the spot (or current price). This type of curve is usually given in commodities with high inventories and whose convenience yield (the utility of owning it physically) is low. For example, gold is usually structurally . In a backwardation market (negative slope) the future price is lower than the current one. Oil,.
The shape of the futures curve is important for investors (whether for hedging or speculative purposes) because it gives us an idea of the state of the situation in the raw material market, both now and in the coming months.