Revision on Stocks and Prices
Many AS microeconomics questions revolve around the volatility of soft commodities such as
coffee, crude oil, rubber and tea and harder commodities such as iron ore, copper, tin and
platinum. It is important to be aware of the important link between stocks and changes in market
prices, especially in an age when commodities have become a new asset class with much more
speculative activity than before. Stocks are also important in many other sectors of the economy
– for example the property market and the market for carbon permits .
Stocks
Stocks are also known as inventories – i.e. finished and semi-finished products that have not yet
been sold in the market.
Imbalances between supply and demand
Stock levels change when there is an imbalance between current market demand and supply
•
•
Stocks fall when demand is ahead of supply
Stocks rise when supply is ahead of demand
Changes in stock levels can have an impact on the ruling market price. When stocks are low,
there is upward pressure on price because purchasers may bid up the price in order to get their
hands on the stocks needed. When stocks are low, it becomes a sellers’ market.
In contrast, when stockpiles rise this may indicate excess supply (or a fall in demand) and this
drives down market prices. When unsold stocks are high, it becomes a buyers’ market
Price volatility is greater when the price elasticity of demand and supply is low
Consider the output and stocks of wheat in the United States
United States, Wheat Stocks and Output
Millions of metric tons
70
70
60
60
50
50
40
40
30
millions
Metric tons (millions)
US Wheat Output
30
US Wheat Stocks (end of year)
20
20
10
10
0
0
94
95
96
Wheat, ending stocks
97
98
Wheat prices have been spiking
to incredibly high levels in
recent weeks and months –
sparking rampant food price
inflation around the world and
riots from people in many
poorer nations whose real
income has been hit by the
soaring cost of basic foods.
99
00
01
02
03
04
05
06
07
Wheat, output
Source: Reuters EcoWin
Wheat output in the USA was
actually lower in 2007 than in
1998 – supply conditions have
changed. But notice that the
level of wheat stocks at the end
of 2007 was at its lowest level
since 1995 – a factor driving
wheat prices higher on the
Chicago trading exchange.
Another good example of the stock-price relationship comes with the market for copper
Copper prices were
persistently low in the early
years of the current decade –
in part because of a sharp
rise in unsold stocks.
Copper Stocks and Prices
London Metal Exchange, World Stock Levels, Million Tonnes, Daily Closing Level
9000
9000
World Copper Price US dollars per tonne
8000
7000
7000
6000
6000
5000
5000
4000
4000
Stock levels started falling
from just under 1 million
3000
3000
tonnes and nearly halved
2000
2000
between the spring of 2002
1000
1000
1.0
1.0
and the end of 2003. But this
0.9
0.9
had little impact on the world
0.8
0.8
price of copper – suggesting a
0.7
0.7
time lag between stock
0.6
0.6
0.5
0.5
changes impacting on market
0.4
0.4
prices. In 2004 there was a
0.3
0.3
further sharp fall in copper
Stock Levels for Copper
0.2
0.2
prices – they collapsed to
0.1
0.1
0.0
0.0
100,000 tonnes – prices
01
02
03
04
05
06
07
08
started to rise and by the
Source: Reuters EcoWin
start of 2006, they had risen
to $00 per tonne. We then saw a sharp upward spike in prices – partly driven by huge speculative
buying (involving hedge funds). Prices have remained high and volatile ever since with prices now
rising towards $98,000 per tonne and stock levels stubbornly below 200,000 tonnes.
millions
Tonnes (millions)
USD/tonne
8000
Have a look at this chart which shows stocks of and prices for nickel – traded on the London Metal
Exchange. Can you spot some stock – price relationships here?
World Prices and Stocks on Nickel
Data from the London Metal Exchange, stocks (000s of tonnes), price $US per tonne
USD/tonne
50000
World Spot Price for Nickel
50000
40000
40000
30000
30000
20000
20000
10000
10000
0
0
60000
Stock Levels for Nickel (tonnes)
Managing stock levels is an
issue if, for example, a
government or appointed
agency wishes to stabilize
prices through a buffer-stock
scheme.
Ask yourself:
How easy is it to control
supply?
50000
What are the costs involved
in managing stockpiles?
Tonnes
40000
30000
20000
How else might speculative
activity be curtailed?
10000
0
Jan
Apr
Jul
04
Oct
Jan
Apr
Jul
05
Oct
Jan
Apr
Jul
06
Oct
Jan
Apr
Jul
07
Oct
Jan Apr
08
Source: Reuters EcoWin
a buffer stock? Who gains? Who loses? Is it sustainable?
Test yourself on this multiple choice test
http://vle.tutor2u.net/mod/quiz/view.php?id=1965
In whose interest is a price
stabilization scheme such as