What Stocks Benefit From a Drop in Commodities

Commodity prices are driven by supply and demand from around the world.

Commodity prices are driven by supply and demand from around the world.

Commodities are part of everyday life. They are raw materials used in anything from plastic water bottles to the fuel that powers your vehicle. Agricultural commodities, including grains and vegetables, are probably part of your everyday diet. Commodities also include common items that corporations in various sectors use to run their businesses. The less money that these businesses must shell out for these materials, the more money they can keep, which stands to benefit their stocks.

Transportation

Transportation stocks, including those that trade in the trucking and airline sectors, stand to benefit from weak prices for energy commodities, such as oil and gas. Fuel is an expense for these companies, and when they can pay less for fossil fuels it leads to higher profits. When companies are earning higher profits, they can spend more money to expand or to pay shareholders cash dividends. In 2012, when the price for oil declined by 7 percent in a week, airline stock prices rose as much as 7 percent in response, according to a 2012 Bloomberg BusinessWeek article.

Food Stocks

Livestock feed is an expense for meat processing companies that must purchase grains and vegetables as food for animals being raised. The more they have to pay for agricultural commodities such as corn and soybeans to feed livestock, the higher their costs and lower the profits. In 2012, when the U.S. experienced a severe drought, the cost for agricultural commodities soared and hurt food companies. By 2013, the supply for agricultural commodities increased, which resulted in lower prices for items like soybeans and corn, and stood to benefit food companies, according to a 2013 Bloomberg article.

Broad Markets

As much as 90 percent of the companies that trade in the stock market use some type of commodities to operate their business, according to a 2011 CNBC article. As a result, declines across the commodities markets can have a positive impact on the broad stock market. The article suggests that companies in the auto, chemicals, apparel and paper sectors could experience improved profits and margins -- which represent the amount of profits companies get to keep after expenses -- from an environment of lower-priced commodities.

Hedging

Although companies can't escape all of the price fluctuations that can occur in the commodities markets, they have a way of protecting their expenses. Through hedging, companies can secure a certain price for commodities, such as fuel and agricultural items, for months in advance. Even if prices for commodities rise, hedging protects a buyer from having to pay full price for an item. Airline company Jet Blue hedged nearly 50 percent of its fuel needs in 2011, and as a result paid nearly 3 cents less per unit of fuel than other airline companies at that time.

 

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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