I’m a little confused about the following relating to Commodities and inflation: " Hedging capability is whether the commodities demand is linked to economic activity. Those that enjoy more or less constant demand regardless of the level of economic activity, seem to provide little hedge against unexpected inflation while those commodities that are most affected by the level of economic activity tend to be better hedges. " I think it should be other way around. The commodities like agricultural, have inelastic demand, so they can pass added cost to consumers-thus better hedges. Am I reading this wrong ??
To your point, if producers can pass the inflation consumer, the price of the commodities will not decrease during the deflationary period --> not good hedges. in this context, we don’t think of the procuder’s profit but focus more on the demand and price of commodities hope that helps
Inflation and business cycle move together more or less. If demand also moves with business cycle , it provide better inflation hedge. If demand is constant, it won’t lead to price increases as much during inflationary / expansionary time. Hope this helps.
fitrangnn, GetSetGo, if producers can pass the inflation to consumer, the price of the commodities will not decrease during the deflationary period --> not good hedges. Correct. But looking from the other way, if producers can pass the inflation to consumer, the price of the commodities will Increase during the inflationary period --> good hedges !!! If demand also moves with business cycle, meaning its elastic it provide better inflation hedge. If demand is constant, inelastic, it won’t lead to price increases as much during inflationary / expansionary time. I think it’s other way around. If demand is elastic, in inflationary times, producers can increase the prices. !!!
When economic activity increases, demand for certain commodities increases (industrial metals, crude oil). As demand for these commodities increase, it puts upward pressure on their prices (law of suppy & demand). On the other hand, some other commodities, who’s demand is not greatly affected by the general economic activity (agricultural products - people’s eating habits don’t change with economic activity), will not see the same upward pressure on prices. I think you may want to leave out elasticity in this context. That might be confusing you. IMO elasticity measures the change in demand/supply with change in prices. While this concept purports the change in prices due to change in demand. Magix.
I think you are looking at this in a complicated way Magix has the simple, magic answer
Hi I think we should look at this on a comparision basis Let’s take cocoa and steel as examples In good time, people buy more cars (discreationary demand) and demand for steel increases, bad time (now) nobody wants to buy new cars–> demand collapses For cocoa, people loves chocolate regardless of good time, bad time. During inflatinary period, cocoa producers can increase price knowing that people still consume chocolate. However, the extent to which price can increase is limited by the nondiscretionary nature of demand. Best,
Good job-thanks fitrangnn. This is what I was looking for.