Companies and individuals often deal in commodities and make profits. Commodities are generally used for the production of other products or services. Raw materials or semi-processed items can be included under the umbrella of commodities. Usually, commodities are goods that can be interchanged with other goods. A commodity does not vary across producers. However, the quality of a commodity can differ a little from one producer to another. Investors that deal in commodities have to address price fluctuation risks. Organisations must be prepared for commodity supercycles in advance. Read on to learn how to protect profits when commodity prices fluctuate.
Understanding commodity price fluctuation
Commodity price fluctuations refer to sudden rises and falls in the market prices of different commodities. Price fluctuations are a reality, and organisations face it all the time. For example, commodity price fluctuations occurred worldwide during the recent COVID-19 pandemic. An organisation dealing in commodities has some expectations with its investments. When there is a sudden rise/fall in the price of commodities, their investment plan fails. Commodity price fluctuations give rise to a commodity supercycle.
Commodity prices are cyclical and can rise at times. When there is a sudden increase in the price of commodities, producers boost supply to gain more profit. However, when the supply of commodities meets demand, prices return to normal. Usually, the price of a commodity stays within a range for the next few years. Sometimes, a sudden emergency occurs, and the demand for commodities rises significantly. At such a time, producers fail to meet the commodity demand over a longer period.
When producers fail to meet commodity demand, prices keep rising. When a sustained rise in commodity prices is observed over a period, it is referred to as a commodity supercycle. The price during a supercycle goes higher than the price trends for the next 10-35 years. To date, four global commodity supercycles have been observed. One commodity supercycle transpired between 1933 and 1950 due to the Second World War.
How to safeguard profits during a commodity supercycle?
Some ways to make money during a commodity supercycle are listed below:
- Companies can start trading/investing in commodities at the right time. Many organisations sign futures contracts to deal with commodity price fluctuations. With a futures contract, the investor can pledge to buy a commodity in the future at a fixed price. So even if the market prices go up, the investor can buy the commodity at the pre-decided price.
- Companies can invest in stocks that grow during commodity supercycles. Many investors rely on exchange-traded funds to combat commodity price fluctuations.
- Invest in companies that will benefit from a particular commodity. For example, if you think gold prices will increase in the future, buy stocks of a gold mining firm.
- Investors must focus on diversifying their commodity portfolio. Instead of investing all their money in a single commodity, invest in different commodities.
Investors can make money during a commodity supercycle, but there is a significant amount of risk involved. Form an action plan to preserve profits during commodity price fluctuations!
