The basic idea
Most commodities are things people cannot do without: cooking oil, fuel, wheat, onions. Even when prices rise, people do not buy much less. And production cannot be raised quickly either: a new crop has to wait for its season, and a new oil well or mine takes years to open.
When both demand and supply are this rigid, even a small shortfall in supply causes a huge jump in price, because demand does not fall until the price has risen a lot. The reverse is also true: a little extra supply sends prices tumbling.
On the afternoon of 8 December 2023, India stopped exporting onions. According to a Dhaka Tribune report, within 12 hours the price of local onions in Dinajpur rose from Tk 90–110 a kilo to Tk 180–200, nearly double. People did not suddenly stop eating onions, and no new crop arrived overnight; so when one import route closed, the price leapt.
Why it matters to an investor
- To size the risk: money in commodities or commodity-dependent companies has to be ready for large, sudden swings.
- To see inflation coming: when world fuel or food prices rise, it shows up in inflation and interest rates at home within months.
- To be wary of “record prices”: big falls after a peak are very common in commodities.
- To understand company earnings: swings in raw material prices make profits swing too.
The main causes
- Weather and season: drought, floods or heavy rain cut harvests and push up farm prices.
- War and supply disruption: war in a major producing region, or blocked shipping, suddenly cuts fuel and food supplies.
- Trade policy: when a country bans exports or raises duties, prices jump in importing countries, as with onions in 2023.
- The world economy: in a boom, factories and transport demand more; in a recession, less.
- The dollar and the taka: commodities are priced in dollars, so a weaker taka raises local prices even if world prices stay put.
- Stocks and speculation: when stocks are low, even small news moves prices; the mood of traders in futures markets can add to the swings.
Some big shocks from history
In July 2008, Brent oil hit a record of about $147.50 a barrel; in the global financial crisis it fell to about $36 by December. In 2020, during Covid, demand dropped so far that the US benchmark WTI briefly fell to minus $40.32: producers were paying buyers to take oil away, because there was nowhere to store it.
In 2022, after the war in Ukraine began, Brent rose to $139 in March. The UN Food and Agriculture Organization’s (FAO) Food Price Index reached its highest level since the index began in 1990 in March 2022; its vegetable oil index rose 23% in a single month. And in 2026, with shipping disrupted by war in the Middle East, the World Bank forecast in April 2026 that energy prices could rise about 24% over the year and urea fertiliser about 60%.
- High prices sow the seeds of the next fall: when prices are high, money pours into new production, and once that supply arrives, prices drop. Oil stayed above $100 until 2014, for example; as US shale supply grew, it fell below $50 by early 2015.
Worked example
- Say a commodity costs $100 on the world market, and $1 = Tk 110. In taka the price is Tk 11,000.
- The world price rises 20% to $120. At the same time the taka weakens 10%, to $1 = Tk 121.
- New price in taka: 120 × 121 = Tk 14,520. A rise of Tk 3,520, or 32%.
Result: 20% and 10% do not add to 30%; they multiply to 32% (1.20 × 1.10 = 1.32). In an import-dependent country, two shocks at once push local prices up much more. The numbers are only an example.
Common mistakes
- Assuming a recent rise will keep going. Big falls after a peak are very common in commodities.
- Watching only the dollar price and forgetting the taka. Your cost at home depends on both.
- Panic-buying and hoarding on news of rising prices, which itself pushes prices higher.
- Thinking prices always return to “the old normal”. Sometimes new supply or demand changes what normal is.
Because neither demand nor supply can change quickly, small shocks become big price swings in commodities, and in Bangladesh the taka’s value can make them bigger still.