Commodities are a delicate business. A plethora of different factors can affect commodity prices in a variety of different ways. You can analyze the data and make projections, but there’s always the potential for a surprise to come along and swing prices to one extreme or the other without warning. A sudden storm may destroy a large portion of the wheat crop for the year, causing wheat prices to soar. Or an upswing in oil production can cause oil prices to plummet.
Commodity Prices Under President Obama
Among the things that can affect commodity price volatility is the political climate. In 2011, a change in the U.S.’s debt grade caused major swings in oil and other commodity prices. Since 1917, the U.S.’s debt has been rated AAA — the highest rating possible. The grade reflects the borrower’s ability to repay their debts, and our nation has always been in excellent standing in that regard.
But then Standard and Poor’s, an independent rating agency, downgraded us from AAA to AA+. A small shift, and still a high rating, but the effects were immediate. Oil and other prices plummeted in panic at the change.
That was during President Obama’s first term in office. But what about his current term? It hasn’t been immune to commodity price volatility either. In particular, there was the infamous government shutdown. For over two weeks last year, from October 1st through the 16th, the federal government ceased all but the most basic operations as President Obama and Congress tried to reach an agreement about the allocation of funds for 2014.
Predictably, this sudden limbo had a noticeable effect on the economy as a whole, and commodities prices in particular. But this was more than just the general panic that resulted from the debt downgrade. The government shutdown cut off the flow of commodities data.
A steady stream of real time data is essential to commodities traders to make investment decisions. And much of that data comes from the government. There are polls of farmers on the current state of their crops. There are reports on the imports and exports of raw materials. There are reports on supply and demand for oil, grain, livestock, and more.
Over the course of the government shutdown, nearly all of these data reports ceased, leaving commodities traders with very little guide for how to invest. There is some private data available as well for most commodities, though more for some than for others. The result, mercifully, wasn’t as catastrophic as it could have been, but it did drive most commodities prices down, especially oil.
This incident illustrates the importance of comprehensive, accurate data in commodities trading. The only way to mitigate the risk of commodity price volatility is by collecting all the available data, analyzing it, and projecting probable outcomes. And when data is scarce, you need to find alternate ways of finding the information you need. What data can you arm yourself with to protect against the next sudden commodity price swing?