The Factors that Lead to Instability of Commodity Price

1.1 Background of the study

Commodity price will influence the economy in some countries in the world. There are many factor that can cause the instability of commodity price. As we know commodity can be classified as goods that demanded by the people. In the economic theory, if the demand higher than the supply it can cause shortage, if this is happen the economy in the country will be instable. In the case of commodities, there are several technique to secure the price of commodity in order to make sure the price is stable. For example, change in exchanged rate, world political situation, inflation, global output, industrial production and etc.

1.2 Problem statement

Over many years, there are many researchers make an analysis about the factor that lead to instability of commodity price. Most of them discover a different idea through out their research about the instability of commodity price. This is important to a country to know what is actually the cause of this factor. Therefore, a research must be conduct in order to know what is actually the factor that lead to instability of commodity price.

1.3 Research objectives

The research objectives of this research as follows:

To determine the factor that lead to instability of commodity price.

To know the relationship between the factors toward the commodity price.

To identify the effect of commodity price.

1.4 Scope and limitation of study

In order to complete the research of the study, I have gathered trusted information from the internet. Few journals have been chosen to get some additional information. After that, in order to get what the objectives want of this study, secondary data have been chosen. The limitation of this study is to choose the best method that can conduct this research and it is hard to choose. There are methods can be used to know the factor that lead to instability of commodity price.

1.5 Significance of the problem

By doing analysis on this study, we can reduce the risk of increasing commodity price due to the economic crisis.besides, we can determine the signoificant variables that effecting the commodity price. This research also can give advantages to government because they can control the commodity prce base on the economic condition.

2.0 Literature Review

Commodity can be defined as goods whereby it is demanded by the people. As we can see today, the price of commodity is now increasing. In my opinion, it may be due the cost of resources that is also increasing. Therefore, we can say that the price of commodity is determined wholly by the market function. Commodity goods are consists of sugar, crude oil, gold, rice and etc. When the value of commodity increases, the cost will increase as well.

There are some reasons that lead to the instability of the price of commodity. Thus, I have found out few reasons from knowledgable person that lead to the instability of the price

of commodity. A study of Frankel& Rose (2009), have shown that the price of commodity is influence by inflation and global output. It was found that the relationship between the commodity and both the inflation and global output is positive. In addition, the microeconomic variables also affect the commodity price. For example, inventories. Another evidence also shown that the inflation also influence the commodity price (Gospodinov & Ng, 2010). After the unemployment gap and oil price being controlled, it was found that the price of 23 commodities were influenced by the inflation. Another study of Bower, Geis & Winkler (2007), also shown that the inflation and exchange rate also influence the price of commodity. On the other hand, the study of Pindyck & Rotemberg (1990), the macroeconomic shock influence the instability of price commodity, whereby, the industrial production and inflation will determine the future demand for commodity and will later affect the price of commodity. Thus, when the interest rate increase, the commodity price will decrease.

However, the study of Bastourre, Carrera & Ibarlucia (2007) have shown a different view on what affect the commodity price. This is because, in the long run the Argentina commodity price is influence by the real interest rate, real exchange rate of United States of America and the demand of raw materials. Other different view regarding instability of commodity price is influence by predictions of conditional variance and conditional expectations theories (Laroque, 1997). The global monetary conditions could also influenced the price of commodity whereby, in another study of Anzuin,Lombardi & pagano(2010), it was found that the monetary policy shock gave impact to the instability of commodity price.

In a different study of Wescott & Hoffman (1999), it was found that the price of commodity as in corn and wheat were influenced by the agricultural policies, stockholding and government pricing support. When the agricultural policy maker asked the producer to increase the price, then the commodity price need to be increased or vice versa.

According to Lalonde, Zhu & Demers (2003), it has shown that the world economic activity and the effective exchange rate of US dollar lead to influence the price of commodity. Thus, if the economic activity is active, it may lead to increase in commodity price. On the other hand, according to Tadesse & Guttormsen (2010) the periodic price threshold influence the instability of commodity price. When the price of threshold increase, the commodity price will increase as well.

After viewing the resources, I found several factors that lead to the instability of commodity price. Those factors consist of inflation, exchange rate, interest rate, global output and more. After identifying all the factors, the theoretical framework can be sketched. Thus, the method to be used can be indentified and hypotheses can be made after analyzing all the data.

2.1 Theoretical framework

Inflation

Exchange Rate The factor that lead to instability of commodity price

Interest rate

Global output

Theoretical framework is the part of the study including in research methodology. Usually the network of association can be more clear explained the entire variable in the study. If we look to the sketch above, there were independent variable on the left side and dependent variable on the right side. What is Independent and dependent variables? Independent is the variables that lend itself, and dependent vice versa. From the sketch of theoretical framework above, we can see that the independent variable consist of four, inflation, exchange rate, interest rate and global output. The dependent variable is the factor that lead to instability of commodity price.

3.0 DATA & METHODOLOGY

3.1 Introduction

By using the secondary data the factor that lead to instability of commodity price can be conducted. Secondary data can be define as the data that already exist by the previous researcher. The data is consist of published and unpublished material such as journal, article and etc. Through the data base, the secondary data can be gained. Thus, the methods for this analysis are used to complete the objectives of the analysis.

3.2 Data, population and sampling method

In order to complete the research, the data can be collected from world bank and Bursa Malaysia. the population is data is collected for Malaysian only. It is because this research is on commodity price in Malaysia.

In my opinion population is the group of people that lives together in certain area. The researcher can gain their information or data in that area in order to complete his research. For example, if the researcher want to investigate about academic dishonesty or plagiarism among the students in UiTM Sabah, he must collect the data from the population in UiTM Sabah only. On the other hand, this research is doing in Malaysia so that the data collected must be suitable because the data based on commodity price in Malaysia.

Sampling method is divided into two which is probability sampling and non probability sampling. By using this sampling method, researcher can cut a lot of time doing research and also can cut cost.

3.3 Analysis of data

To estimate the data, the univariate modeling technique such as naïve trend model, exponential smoofhing and lagragian model will be use.

3.4 Hypothesis development

The hypothesis that can be concluded for this research is whether the dependent variable such as inflation, exchange rate, interest rate and global output will effect the instability of commodity price. The directional and the non directional hypothesis is the classification of hypothesis. The null and alternate hypothesis can either be rejected or accepted in accordance with the result from the test of the variables.

3.5 Summary

Before conducting a research, we have two element that have to be taken into consideration that is the data and methodology. It is better to make sure the availability of data before one proceeds to do research. To gain an accurate result for a research we must use proper methods. When data is already gathered and analyzed, hypothesis can then be tested.