The daily movements in the world's equity markets are influenced by a multitude of factors, ranging from large institutional block trades and program trading to earnings and economic reports. However, one factor that is frequently overlooked is the influence of commodity prices. In fact, fluctuating commodity prices can have a tremendous impact on the earnings of public companies and, by extension, the markets. Read on to learn more about this relationship and why it matters to investors.

Lumber Prices
The average person would probably never ponder the cost of lumber unless he or she was in the process of building a house. However, the pricing of this commodity is closely watched and can affect many companies, such as homebuilders.

However, it's also important to note that many other types of companies pay close attention to lumber prices as well. For example, companies that are looking to expand and build out new locations, such as restaurants, retail chains and even pharmaceutical companies looking to build new manufacturing facilities would naturally be interested in the cost of lumber. After all, even a small tick up in prices can materially affect the cost of a structure.

Random length lumber futures and options trade daily on the Chicago Mercantile Exchange (CME) (Find out more about these on the CME Random Length Lumber Futures & Options page.) Quotes and information may also be published in the Wall Street Journal or Investor's Business Daily and is often noted on major business channels, such as CNBC.

Oil Prices
Many consumers only think about oil prices in the context of how it directly impacts their wallets. In other words, how much they will end up paying at the pump as the result of price fluctuations. However, oil is one of the cornerstones of the North American economy and its price is highly important to companies of all stripes.

The price of oil can affect a variety of companies ranging from retailers to manufacturers of plastics (oil byproducts are a big component in plastic). Just think about how all of the products that are on the shelves at your local Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are shipped.

By extension, this means that these companies either have to eat the rising cost of fuel or try to pass some of it along to consumers in the form of higher prices. Unfortunately however, if they aren't able to pass along the cost increase, it can have an adverse impact on margins and net income, which can put downward pressure on stock prices and hurt investor returns.

The price of crude can be tracked on the New York Mercantile Exchange (NYMEX). (For more, see Oil And Gas Industry Primer.)

Cotton Prices
Cotton is used in a wide variety of products. For example, many types of clothes contain large amounts of cotton; therefore, rising prices can have an adverse impact on an apparel retailer's cost of goods sold and declining prices can have a positive impact.

Of course those in the apparel industry aren't the only parties that can be impacted by changing cotton prices. In fact, it's also a key component in things like furniture, coffee filters and a variety of other materials that we all have come to depend on.

As such, companies that sell these items have only a couple of choices when dealing with rising cotton prices. They can raise the price of the product, and/or eat the rising cost. Again either or both of these choices can have an effect on income and by extension stock prices. (For related reading, see The Sweet Life Of Soft Markets.)

Wheat is the primary ingredient in many popular cereals and foods. While cereal and other food producers may be able to pass along some of these costs, they may have to absorb some as well. This can impact their margins and, by extension, their profits.

Of course makers of such products aren't the only ones affected. Grocery and convenience stores must purchase the items to keep shelves stocked. Also don't forget about the impact on distributors and any middlemen. Fluctuating wheat prices can have a far-reaching impact on a variety of companies and on consumers. (For more, see Grow Your Finances In The Grain Markets.)

Corn in one form or another is used in a variety of products ranging from cereals, building materials, alcohols and even tires.

It's also worth noting that the price of corn is impacted by the demand and production of ethanol, which is an increasingly popular corn based fuel. As the demand for alternative fuels ramps up, corn prices could go even higher. Food manufacturers, retailers, consumers and, by extension, stock prices can be affected by fluctuating corn prices. (For related reading, see The Biofuels Debate Heats Up.)

Rising or declining coffee prices can certainly have an impact on consumers that enjoy drinking it in the morning. It can also have an affect on companies that do a brisk breakfast business, such as diners and fast food chains like McDonalds (NYSE:MCD) or Burger King (NYSE:BKC). Also, companies like Starbucks (NYSE:SBUX), which derives the lion's share of its revenue from coffee or coffee related products, can be dramatically impacted as well.

The price of gold can have an impact on jewelers as well as on retailers that sell or receive a portion of their sales from jewelry related items. For example, Macy's (NYSE:M) and many of the other well-known mall-based department stores generate a significant amount of revenue from their jewelry departments.

Gold can also be used in medical products, glass making, aerospace and a variety of other businesses. By extension, this means that fluctuations in gold prices can make the markets move.

In addition, because gold is found and valued all over the world, it is considered a universal currency. So, if the outlook for the U.S. equity markets and/or the economy is dim, it's likely that the demand for gold will increase as investors "flock to safety."

If it appears as though the economy is about to perk up, or that corporate earnings are going to be on the rise, investors tend to abandon gold in favor of equities. (For more, see Does it Still Pay To Invest In Gold?)

The Bottom Line
Although there are a variety of factors that can move markets, commodities can have a major influence on businesses, stocks and portfolios. When you're looking to invest in a particular sector or company, take a look at relevant commodity prices and what this might mean for your investments going forward.

Related Articles
  1. Stock Analysis

    Best Stocks to Buy for Around $1 (NXTD, MBII)

    Watch for strong technical indicators and other positive information when considering the purchase of any stock trading in the $1 range.
  2. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  3. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  4. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  5. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
  6. Investing Basics

    5 Types of REITs And How To Invest In Them

    Real estate investment trusts are historically one of the best-performing asset classes around. There are many types of REITs available.
  7. Investing Basics

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  8. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  9. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  10. Retirement

    Dollar Shave Club Review: Is It Worth It?

    Learn about the business model of the Dollar Shave Club, and find out whether the razor subscription company is a worthwhile investment.
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  4. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  5. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  6. Can hedge funds outperform the market?

    Generating returns that exceed those provided by the broader market is the goal of nearly every investor. However, the methods ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center