Why commodity prices spike (and then crash)
Commodity prices spike when a supply shortfall meets demand that will not shrink and inventories that cannot cover the gap, so the price has to do all the adjusting. They crash for the mirror reason: once demand has been rationed, extra supply has arrived and inventories have refilled, the premium paid for immediate delivery has nothing left to buy.
The pattern repeats across crops, metals and fuels, and its shape is set by physics rather than sentiment. Trees, mines and refineries take years to build; a bad season takes months to appear; and people keep eating and heating in the meantime.
Why does a small shortfall produce a large price move?
Economists call it inelasticity, and in commodities it runs on both sides at once.
Supply is slow because biology and geology are slow. A cocoa tree planted after a price rise yields meaningfully in about five years; a copper mine takes longer still. In the short run the supply curve is nearly vertical: no price, however high, produces more beans this season. There is one exception that makes spikes worse rather than better, which is that high prices can pull forward harvesting and destocking, borrowing from next season’s supply.
Demand is slow because the goods are necessities embedded in larger products. Cocoa is a few percent of the cost of a chocolate bar, natural gas heats a house that cannot switch fuel this winter, and a tire needs rubber. When the input is small relative to the finished good, buyers absorb a large price rise before they change behavior.
With both curves steep, the market clears through price rather than quantity. Removing 5% of consumption may require a price move several times that size, because the buyers who give up are the last, least committed ones.
Inventory decides how much of that adjustment is needed. A shortfall that lands on a comfortable stocks-to-use ratio is absorbed from the warehouse. One that lands on a thin ratio has to be rationed immediately, and the market moves into backwardation as buyers pay a premium for goods now over goods later.
The crash is the same machine running backwards, and it usually takes longer to start. Demand rationing accumulates: chocolate makers reformulate, feeders switch grains, industry substitutes. Supply responds with a lag: new plantings mature, idle capacity restarts, marginal mines reopen. Inventories rebuild. Because both responses overshoot the shortfall that caused them, the price often falls further than the fundamentals alone would suggest.
Monthly averages smooth the daily extremes, and even so the benchmark more than quadrupled and then gave most of it back.
A worked example
Follow cocoa month by month in the World Bank Pink Sheet. The benchmark, an average of the New York and London quotations, sat at $2.47 per kilogram in January 2022 and $2.24 in July 2022, the lowest month of the episode. It was still only $2.62 in January 2023.
The climb then ran for two years: $3.46 per kilogram in August 2023, $4.40 in January 2024, $6.88 in August 2024, and $10.75 in January 2025, the highest monthly figure in a series that begins in 1960. Annual averages tell the same story more slowly, at $2.39 per kilogram in 2022, $3.28 in 2023 and $7.33 in 2024.
The concentration behind it is unusually tight. World cocoa bean production was 5.22 million tonnes in 2024, of which Ivory Coast grew 1.89 million tonnes, or 36.2%, and Ghana 530,000 tonnes, or 10.1% (FAOSTAT). In trade, world cocoa bean exports were $18.87 billion in 2024, with Ivory Coast at $4.96 billion, or 26.3% (CEPII BACI). There is no fifth-largest producer big enough to cover a West African shortfall.
Then the unwind. From the January 2025 peak the benchmark fell to $7.60 per kilogram in August 2025, $4.97 in January 2026 and $3.24 in March 2026, a fall of about 70% in fourteen months, before recovering to $5.95 per kilogram in August 2026. Nothing about the demand for chocolate changed that fast. What changed was that grinders had reformulated and cut volumes, growers had harvested aggressively into high prices, and the inventory cushion had begun to rebuild. The 2024 cocoa spike sets out the sequence in detail, and the monthly series is on the cocoa price page.
European gas ran the same arc on a different clock: the Pink Sheet put TTF at $70.04 per million British thermal units in August 2022, its highest month, then $11.19 in August 2023 and $12.37 in August 2024, described in the 2022 energy shock.
What amplifies a spike, and what does not
Three things reliably make a move larger. Concentration, because a shortfall in one region cannot be sourced elsewhere. Policy, because a large exporter restricting shipments through an export ban shrinks the traded pool without changing world production. And thin inventory, because there is nothing to draw down.
Speculators belong in a different category. They add liquidity that lets producers and processors transfer risk, and their positioning can extend a trend, but they do not hold the physical goods and cannot withhold them. A price that rises without a physical imbalance is sold into by the people who own warehouses. The reliable tell for a genuine squeeze is not futures positioning but the spot price trading above deferred delivery, which only makes sense when the goods are genuinely scarce today.
Frequently asked questions
Why do commodity prices spike so violently?
Because neither side of the market can adjust quickly. A cocoa tree planted today yields in about five years and a mine takes longer, while buyers of food and fuel cut consumption very little when prices rise. With both curves steep, a small change in quantity requires a large change in price to clear.
What makes a spike turn into a crash?
The same steepness working in reverse. High prices eventually ration demand, coax out extra supply and refill inventories, and once the cushion is rebuilt the premium for immediate delivery disappears. Cocoa fell from $10.75 per kilogram in January 2025 to $3.24 in March 2026 (World Bank Pink Sheet).
Do speculators cause price spikes?
They amplify moves rather than create them. Speculators supply liquidity that lets hedgers transfer risk, and their positioning can extend a trend, but a spike requires a physical imbalance. Prices that rise without one tend to fail quickly, because holders of the actual goods sell into them.
How long do commodity spikes last?
Usually one to three seasons for annual crops and longer for tree crops and mined metals, because the supply response takes that long to arrive. European gas averaged $70.04 per million British thermal units in August 2022 and $11.19 in August 2023 (World Bank Pink Sheet).
Why does a 5% shortfall move prices more than 5%?
Because the missing quantity has to come out of consumption, and food and fuel demand barely responds to price. To remove 5% of use, the market may have to raise the price by a multiple of that, until the least committed buyers finally step back.
What role do export bans play?
They shrink the traded market without changing world production. When a large exporter restricts shipments, importers compete for a smaller pool, so the international benchmark can rise sharply even when the global balance sheet looks adequate.