Supply & Demand on Price

Price is determined by the interaction of supply and demand. Market price is dependent upon both of these fundamental market forces. The successful commodity trading transaction occurs when buyers demand and sellers supply agree on price. When this exchange occurs, the agreed upon price is called the equilibrium price, or market clearing price. This can be seen below as supply and demand.

Buyers and sellers are willing to exchange the amount of commodity Q at the agreed price P. At this point, supply and demand is in balance. At any price below P, the amount demanded is greater than the amount of supply. This situation would create a price in which the producer is unwilling to supply, creating a commodity shortage. In order to obtain the commodity consumers would have to pay a higher price, while producers would demand higher prices in order to bring more supply to the market. The end result is a rise in prices to the point P, where supply and demand is once again in balance. However, if prices rose above P, the market would have a surplus glut; more supply relative to demand. Producers would have to reduce prices in order to clear the market of excess supply. At this point, Consumers would then increase purchases as a result of the lower prices. Prices will balance until supply and demand are again in balance at point P above.

Market prices are not always fairly priced to all in the marketplace. Supply and demand does not always guarantee buyers and sellers; this depends on their competitive positions within the market. Market prices play a central role in competitive landscape of the commodity markets; extremely low prices result in excess profits for the buyer, attracting demand. Conversely, excessively high prices attract additional producer competition, which creates supply. Therefore, varying price levels exist where buyers and sellers are satisfied, creating market price.

When supply and demand changes, prices for a commodity will change. For example, good weather normally increases the supply of grains and oilseeds, with more products being made available over a range of prices. With ought increase in the quantity of commodity demanded, there will be movement along the demand curve in order to remove excess supplies. Consumers will buy more but only at a lower price.

Shifts in demand due to changing consumer preferences will influence market price. Recently, there has been a shift in demand on the part of overseas Canadian wheat futures buyers toward the Canada Prairie Spring varieties, away from the Hard Red Spring varieties. A decline in the preference for Hard Red Spring wheat shifts the demand curve inward. With ought reductions in supply, the effects on price results to a lower price where supply and demand is again balanced. For prices to increase again, producers need to reduce the amount of hard red spring wheat in the market place or find new sources of demand.

Supply and demand changes can short or long term in nature. Weather tends to influence commodity prices generally in the short term, where as consumer preferences can have either a short or long term effect. Luxury goods may enjoy a short-term shift in demand due to changing styles, while necessities have long-term demand. A major factor influencing commodity markets is technology. An effect of technology can bee seen in agriculture, which can shift out the supply curve rapidly by reducing costs and at the same time increase sufficiently to meet any excess demand. The rapidly outward-shifting supply curve, coupled with a slower moving demand curve, has generally contributed to lower prices for agricultural production when compared to prices for industrial commodities.

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