Commodities Explained / Supply and Price Drivers

Build a simple balance sheet and distinguish production flows from the stock of material already available.

Flows and stocks answer different questions

Production and consumption measure activity during a period. Inventory measures material held at a point in time. An annual supply deficit means use exceeds the supply counted in that period’s balance. It does not mean every buyer is unable to obtain the commodity immediately.

Previously accumulated stocks can bridge a gap. Their usefulness depends on quality, location, accessibility and whether owners are willing to sell.

Write the balance before the interpretation

For a simplified national market, ending stocks equal beginning stocks plus production plus imports, minus domestic use and exports. Real statistical balances may include losses, adjustments and other items. Use the definitions supplied by the reporting agency.

Global balances require care because one country’s exports become another’s imports. Adding all national trade flows without reconciliation can double count movement rather than measure new supply.

Worked example

Suppose a market starts with 20 units, produces 100 and imports 10. Domestic use is 95 and exports are 15. Ending stocks are 20 units: 20 plus 100 plus 10 minus 95 minus 15. If production falls to 90 with every other figure unchanged, ending stocks fall to 10.

The inventory decline is 50%, but total use did not rise 50%. A small change in a large flow can produce a large percentage change in a smaller stock.

What the ratio leaves out

Dividing ending stocks by a consistently defined annual use measure gives a stocks to use ratio. It helps put inventories in context, but is not a universal price model. Different commodities, seasons and reporting systems have different normal conditions.

Compare the same series across comparable periods. Ask how much inventory is available commercially, whether it meets the required grade, and how complete the reporting coverage is. A total can conceal local shortages or inaccessible reserves.

Put it into practice

In the example, ending stocks are 10 and total use including exports is 110. What is the stocks to use ratio? What does it not tell you?

Check your answer

The ratio is about 9.1%. It does not identify the location or quality of the stock, whether it is available for sale, or the price needed to release it.

Sources and further reading

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