Why would stockpiling commodities lead to depressing prices?

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Question: 

I recently read a story about China stockpiling commodities.
https://www.agriculture.com/news/business/doud-china-is-stockpiling-worl...

Mr Doud, the chief agricultural negotiator for the U.S. trade representative, has put out statistics saying that China has been stockpiling large amounts of the world’s residual supplies of grains and other commodities and says that stockpiling these commodities is “depressing prices for every other farmer across the globe,”. But why would stockpiling lead to depressing prices? It would seem to me that taking residual commodities off the market (stockpiling) would have the opposite effect; that it would create greater competition for the remaining supplies, which would lead to higher prices.

Answer: 

The impact of stockpiling commodities on prices depends on the timeframe. While the stockpiling is occurring, your reasoning is accurate. The stockpiling is removing supplies from the market, creating more intense competition for the remaining supplies, which translates into higher prices. However, once the stockpiles are established and the next round of production is underway, the stockpiles become an alternative source for the commodity. As a user, I can either buy the commodity from the next round of production or the stockpile. The stockpile is no longer decreasing supplies, but increasing them as the stored commodity can reenter the market. It’s this impact that Mr. Doud was referencing. Mr. Doud stated the Chinese stockpiles in terms of their percentage of the total global residual supply. Allow me to state them in terms of their percentage of total global production, based on data from the latest United States Department of Agriculture’s World Agricultural Supply and Demand Estimates report. The size estimates for the Chinese stocks translate to roughly 15% of global wheat production, 10% of global corn production, 18% of global rice production, 40% of global cotton production, and 6% of global soybean production. Thus, the stocks can be seen as effectively adding those percentages back into the global supply position. And a supply increase of 5-40% definitely has pricing implications. So stockpiling leads to both higher (in the short-term) and lower (in the longer-term) prices.

 

Answered by:
Dr. Chad Hart
Associate Professor
Last updated on March 26, 2018