How Does Commodities Futures Trading Affect the US Economy?

The Hidden Manipulators of Food and Gas Prices

commodities trader on floor
A trader signals an offer in the corn options pit at the CME Group March 15, 2011 in Chicago, Illinois. Scott Olson/Getty Images

Commodities futures trading affects the economy by changing the prices of food, energy and metals. Thanks to commodities traders, commodity prices can be affected by more than just the laws of supply and demand.

For example, commodities are traded in U.S. dollars. As the value of the dollar increases, the price of commodities falls. That's because traders can get the same amount of commodities for less money.

(Source: "Inverse Relationships Between Dollar and Commodities")

2015 - Traders Sent Commodities Prices Plummeting

In 2014, the dollar index rose 15%. By 2015, aluminum prices had fallen 19%, and copper prices were down 27%. Oil was hit the worst, as prices fell to a 6-year low. (Source: Copper, Aluminum Fall to Six-Year LowWSJ, August 3, 2015)

Supply and demand had some impact as well. China's economy started slowing, reducing demand for copper. As part of its economic reforms, China was shifting from construction to consumer spending. It wanted to rely less on exports, and more on domestic demand. That further reduced the need for copper, since housing construction uses a lot more copper than consumer products. China's construction industry had used 3-4 million tons a year. That's equal to what was used by the entire economies of the United States, Japan, Canada, and Mexico combined.

China also added to the supply of commodities, further lowering prices.

In 2014, the country produced 52% of global aluminum. It boosted that amount in 2015, adding 10% to supply. (Source: "Metal Meltdown," Bloomberg BusinessWeek, October 11, 2015)

China is also entering the commodities trading markets. The Shanghai Gold Exchange sold $200 million of gold in July 2015, sending prices down worldwide.

It traded 316 tons in July, a 44% rise from last year. The Bank of China became part of the Lond-based Gold Fix price-setting mechanism. The Shanghai Futures Exchange trades 31% more steel, zinc, and aluminum.  The London Metals Exchange was bought by the Hong Kong Exchange.(Source: "Giant Appetite," WSJ , August 26, 2015.)

2008 - Traders Created Oil Price Bubbles

One of the most critical commodities is oil. The price of oil changes daily, which has an impact on every good and service produced in America. As traders take into account all information regarding oil supply and demand, as well as geopolitical considerations, this affects oil prices. It is these assumptions behind oil prices that affect the economy so significantly. For more, see Why Are Oil Prices So High?

For example, in 2008 oil prices skyrocketed. The was despite the fact that global demand was down, and global supply was up. The Energy Information Administration reported that oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter of 2007 to 85.73 million bpd as of in the second quarter 2008. During this same period, supply rose 85.49 million bpd to 86.17 million bpd. According to the laws of supply and demand, prices should have decreased.

Instead, by May prices rose almost 25%, from $87.79 to $110.21 per barrel of oil.

The EIA reported that the "flow of investment money into commodities markets" caused the trend. Money that traders had invested in real estate or stocks was diverted into oil futures. Later that year, frenzied commodities traders drove the price up to its all-time high of $145 a barrel.

Traders Caused Food Riots

Commodities traders were also responsible for high food prices that created riots in less-developed countries.First, funds were also directly diverted into wheat, corn, and other commodities. Second, high oil prices lead to higher distribution costs for food. For more, see What Is the Real Reason for High Oil Prices? (Source: BBC News, Commodity Boom Continues to Roll, January 16, 2008; CNN, Riots, Instability Spread as Food Prices Skyrocket, February 18, 2008)

Thank Commodities Traders for High Gas Prices

In January 2013, traders bid up oil prices early in the year. They were concerned about a potential threat on of the world's most strategic oil shipping lane. Iran created the fear by playing war games near the Straits of Hormuz. By February 8, oil prices had risen to $118.90/barrel, sending gas prices to $3.85 by February 25.

That occurred earlier than in 2012 when Iran threatened to close the Straits. Traders didn't bid up oil prices until March, sending gas prices higher in April.

In 2011, oil prices didn't start rising until May, sending gas prices up immediately. That was a result of traders anticipating higher oil and gas prices due to higher demand from the summer driving season.

Oil makes up 72% of the price of gas. When oil prices rise, it usually shows up in gas prices a three to six weeks later. For more, see How Crude Oil Prices Affect Gas Prices.

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