How Market Structure Drives Commodity Prices

TL;DR

This paper presents an agent-based model explaining how market structure influences commodity prices, revealing phase transitions and turning points that align with empirical data on commodities like metals and agricultural products.

Contribution

The paper introduces a novel agent-based model linking market structure to commodity prices and validates it with empirical data showing price dynamics and turning points.

Findings

Prices rise sharply when resources are scarce.

Turning points mark the disappearance of excess producers.

Empirical data confirms model predictions and identifies yield points.

Abstract

We introduce an agent-based model, in which agents set their prices to maximize profit. At steady state the market self-organizes into three groups: excess producers, consumers and balanced agents, with prices determined by their own resource level and a couple of macroscopic parameters that emerge naturally from the analysis, akin to mean-field parameters in statistical mechanics. When resources are scarce prices rise sharply below a turning point that marks the disappearance of excess producers. To compare the model with real empirical data, we study the relations between commodity prices and stock-to-use ratios of a range of commodities such as agricultural products and metals. By introducing an elasticity parameter to mitigate noise and long-term changes in commodities data, we confirm the trend of rising prices, provide evidence for turning points, and indicate yield points for less essential commodities.