# Prices and cycles You will understand how commodity prices are actually set, from exchange rings to benchmark talks and price assessments, and why they swing so violently. You will learn to read the forward curve through the theory of storage, to judge long-run trends in real prices, and to tell a business cycle from a boom or a claimed super-cycle, using cases from the 1973 oil shock to the 2022 fertiliser shock. Source page: https://www.materialinsights.org/learn/commodities/prices-and-cycles/ [Understanding Commodities](https://www.materialinsights.org/learn/commodities/) / Module 5 ## Prices and cycles You will understand how commodity prices are actually set, from exchange rings to benchmark talks and price assessments, and why they swing so violently. You will learn to read the forward curve through the theory of storage, to judge long-run trends in real prices, and to tell a business cycle from a boom or a claimed super-cycle, using cases from the 1973 oil shock to the 2022 fertiliser shock. 5 parts · 19 sections · about 50 minutes · 0 of 5 parts read ### By the end you will be able to - Explain how exchange prices, producer prices, negotiated benchmarks, price assessments and transfer prices are formed, using iron ore's 2010 move to index pricing as a case. - Trace commodity volatility to inelastic demand and supply, inventory amplification and shocks, and explain why price stabilisation failed in the 1985 tin crisis. - Use the theory of storage to explain contango, backwardation and the forward curve, and calculate a cost-of-carry ceiling and an implied convenience yield. - Evaluate the evidence on long-run real price trends, including the deflator problem, Prebisch-Singer, Hotelling and Tilton's review of scarcity measures. - Distinguish business cycles, booms and super-cycles, and assess the roles of China, financial investors and the dollar. - Read a tile's monthly nominal and annual real price charts and its one-, five- and ten-year changes without being misled by end points or averaging. ### Contents 1. [Part 1 How a commodity price is made](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p1/) Every price on a tile came from some mechanism: a trading ring in London, a phone survey by a price reporter, months of haggling between a miner and a steel mill. The mechanism decides how fast the price moves, who can see it, and whether anyone actually paid it. Start with the economics beneath them all, then the institutions. - The price is set at the margin, by the last unit of supply that is needed - Exchanges discover the price, and most physical trade borrows it - Where no exchange works, prices are announced, negotiated or assessed 2. [Part 2 Why commodity prices swing so hard](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p2/) Commodity prices have been more volatile than prices of manufactures for as long as records exist; Radetzki and Wårell cite evidence back to 1700. The reasons are structural: steep supply and demand curves, inventories that amplify demand, and shocks hitting a system with little slack. Then there is what happened when governments tried to hold prices still. - Steep curves: demand that will not budge and supply that cannot - Inventories amplify demand, and panic buying can double a shortage - Shocks hit a system with little slack: weather, war and policy - Holding prices still: buffer stocks and the tin crisis of 1985 3. [Part 3 Storage, convenience yield and the forward curve](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p3/) A commodity has many prices at once: one for delivery today and one for each future month. The line joining them is the forward curve. The theory of storage explains its shape through what it costs, and what it is worth, to hold physical stocks. With it you can read tightness, glut and even negative prices off the curve. - Holding stocks earns a convenience yield, and its size depends on how scarce stocks are - Contango: when stocks are ample, the forward price is capped by the cost of carry - Backwardation: when stocks are scarce, spot can rise without limit - A futures price is not a forecast, and in 2020 storage ran out 4. [Part 4 Real prices and the long-run trend](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p4/) Over decades the question is where prices are heading. Are raw materials getting scarcer and dearer, as classical economists and depletion pessimists expected, or cheaper relative to manufactures, as Prebisch and Singer argued? The answer depends on the deflator, the end points and the commodities chosen. The same care applies to reading the charts on the tiles. - A real price is a ratio, and the deflator decides the story - The evidence: falling for crops and most metals, rising for oil, and never fixed - Why the trend: Prebisch-Singer, technology against depletion, and Hotelling's rule - How to read the price charts on a tile 5. [Part 5 Booms, super-cycles, money and the dollar](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p5/) Beyond the business cycle sit longer swings: booms lasting a decade and, some argue, super-cycles of several decades. The most recent, driven by China, transformed the mining industry and then unwound. Two outside forces get blamed for such swings: financial investors and the dollar. This part tests both against the evidence and ends with the 2008 spike and crash. - Business cycles, booms and super-cycles are different claims - The China super-cycle and its unwinding - Financialisation: did index investors inflate the 2008 spike? - Exchange rates: the dollar's weight in the world decides how much it moves prices 6. [Wrap-up Key terms, try it in the table, final quiz, sources](https://www.materialinsights.org/learn/commodities/prices-and-cycles/review/) [Start: Part 1, How a commodity price is made →](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p1/) ## Other sections - [How a commodity price is made](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p1/index.md) - [Why commodity prices swing so hard](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p2/index.md) - [Storage, convenience yield and the forward curve](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p3/index.md) - [Real prices and the long-run trend](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p4/index.md) - [Booms, super-cycles, money and the dollar](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p5/index.md) - [Key terms, quiz and sources](https://www.materialinsights.org/learn/commodities/prices-and-cycles/review/index.md)