What Sources of Information are Available when Managing Commodity Price Volatility?
Published by ChAIDec 2 2022
Accessing good market intelligence is vital when implementing an effective strategy for managing commodity price volatility. A key challenge is, therefore, knowing which sources you can rely on for market information. In this blog we evaluate some of the available options for companies.
Perhaps the most obvious place to start is commodity-focused news. The main advantage of this approach is that there is almost endless information that can be found online regarding raw material markets. Whether looking at an established brand such as Bloomberg, Reuters or the Financial Times, or following an industry-focused publication, news media can be a valuable source of information to build an understanding of what is driving markets.
The widespread availability of news media on commodity markets is both its strength and its weakness. In an era where the term ‘fake news’ is commonplace, the threat of misinformation is widely understood and the issue can largely be avoided in the commodities world by sticking to reports from well-established news organisations. However, the news stories that drive markets are often as volatile as the markets themselves, so relying on news as a primary source of market intelligence requires a significant amount of engagement. News about an export ban of a specific commodity from a country, and its potential impact on the global market, can be reported on a Monday afternoon and retracted by Tuesday morning due to a policy U-turn. Staying in control of these kinds of developments is a major challenge, but what is more difficult is interpreting which news is genuinely important for your markets. This nuanced knowledge of which data to focus on, and which is superfluous, comes with years of experience in the markets. For those without an extensive background in commodity markets, alternative sources of market intelligence can be vital in filtering out some of the excess news and noise surrounding markets.
Updates from Organisations
A more focused approach to researching key information that will drive commodity markets is to follow reports released by industry organisations. An obvious example for this would be monitoring OPEC’s monthly reports regarding expected global production levels for oil. There are also many organisations that offer more granularity in their reporting. Examples include the Energy Information Administration (EIA), which produces detailed statistics regarding both the supply and demand of petroleum products around the world. Similarly, the United States Department of Agriculture (USDA) produces regular reports on various grain commodities which include details such as the total area planted and expected yield across different regions. These reports offer a more detailed view of supply and demand dynamics in specific commodity markets, and can be especially useful in niche markets provided there is an organisation that provides such reports. However, the challenge of interpreting this data accurately remains. Furthermore, these reports tend to be focused on the fundamental supply and demand information and therefore do not cover other important market drivers, such as GDP figures or currency movements for example. In order to access analysis of these data types as well, different information sources are required.
Reports from Banks and Analysts
A common resource for monitoring commodity markets is reports produced by banks, trading houses, consultancy firms or individual analysts. Whether using outlooks from Goldman Sachs or the World Bank, WoodMac or Cargill, there are many established names within this area that can provide valuable market intelligence for managing raw material costs. They offer expert insight into specific commodities and the forces driving markets, potentially saving hours instead of conducting the same analysis in-house as the writers are able to filter out unnecessary information and highlight a handful of key factors to monitor. In a similar way to outlooks produced by trade organisations, analysts can utilise their specialist knowledge of a particular market to provide insights that are difficult to find elsewhere. Also, the opinions expressed in these reports are considered to be reputable sources on which to base strategy decisions.
There are some drawbacks to these kinds of reports, the most notable being how infrequently they are released. Usually monthly or quarterly, these reports provide very detailed market analysis at the time they are produced, but can become outdated quickly in volatile periods. This issue is exacerbated for long-form reports, which can be expensive but suffer from the same issue of potentially becoming redundant.
Market Insight Platforms
A final option to consider for accessing commodity market intelligence is to use a specialist third party solution provider. Due to the increase in market volatility in recent years, this marketplace has grown and there are now a number of providers who offer different approaches to the problem. Some companies may focus on providing insights into a specific sector of the commodity world, such as oil and its derivatives, while others may cover a wider array of markets but with less detail. Similarly, some companies approach the issue from a solely quantitative perspective while others rely on the expertise of its team.
Third party solutions can offer great insights to complement your company's existing process for managing commodity price volatility. For example, while there may be category experts within your team who have great fundamental knowledge of a market built on experience, a data-focused insight solution can provide an unbiased counter-view to help your team reach the most informed opinion The key to gaining the most value from a solution is to identify a provider whose solution aligns with the requirements and objectives of your team, so it is vital to compare different solutions to determine which best aligns with your business.