John Kemp is a Reuters market analyst. This article has been edited for length.
Time is the most important variable in commodity markets but also the most frequently overlooked.
Observers too often become trapped in a short-term outlook and fail to notice that the world is gradually changing around them.
As is well known, supply and demand for most commodities are fixed in the short term and show little response to small price changes.
Lack of responsiveness in the short term is why large price adjustments are required to force markets back into balance and why commodities exhibit more volatility than the prices of other goods and services.
Read Also
Sask. ag group wants strychnine back
The Agricultural Producers Association of Saskatchewan has written to the federal government asking for emergency use of strychnine to control gophers
In the long term, however, supply and demand become almost infinitely variable. Investors can develop new sources of supply, inefficient producers can close, consumers can change their behaviour and alternatives to most raw materials can become available.
However, the most interesting time frame from an analytical point of view is the medium run, where the short term shades imperceptibly into the long term and where supply and demand are neither fully fixed nor completely flexible.
It is the medium run that has by far the most interesting price and technology dynamics as producers and consumers figure out whether to make expensive changes that may pay off only over many years or even decades.
In reality, commodity market time is a continuum. The short run shades into the medium term and the medium run shades into the long run in an indistinct way that differs significantly from industry to industry.
For agricultural commodities, the most important distinction between the short run, the medium term and the long term is the length of the crop cycle, which varies from as little as a year for grain to decades for new forests.
For minerals and petroleum, the cycle is determined by the time that is needed to identify new resources and alternative technologies, plan and finance major new capital projects and then build them, which can take as long as 10 years for a major new mine or offshore oil field.
As a result, price cycles for industrial raw materials tend to be deeper and longer than for faster-reacting farm products.
However, even the most capital intensive and slowest responding commodities do not remain stuck in the short run forever.
In the past 10 years, industrial, energy and agricultural commodities have experienced the biggest and most synchronized upswing since the 1970s.
It is a shift that many analysts have dubbed the super-cycle, meaning prices have been stronger for longer.
However, the super cycle that began around 2000 is still a cycle, as the name implies.
The cyclical behaviour of commodity markets, which is deeply rooted in their fundamentals, has not been repealed, only exaggerated, this time around.
Prices may have risen higher and been sustained longer than in preceding cycles, but that does not mean they will remain near record peaks forever.
Prices for almost all major commodities peaked at some point between 2005 and 2012, ranging from U.S. natural gas (in 2005 and 2008), nickel (2007), crude (2008), aluminum (2008), wheat (2008), cocoa (2010), copper (2011), corn (2012) and soybeans (2012).
In most cases, however, prices are now well below their previous levels and the downward leg of the price cycle appears firmly established. More supply increases still to come will add to the downward pressure in the short term.
The current price cycle looks well past its peak even for slow-responding commodities such as oil, iron ore and rare earth minerals.
Their supplies are now responding aggressively to the run-up in prices over the past decade, which was only briefly interrupted by the financial crisis in 2008 and 2009.
Demand is also starting to shift as consumers learn to cut their use of raw materials or find cheaper, more plentiful alternatives.
