26 August 2010

World Bank examines commodity price trends

With significant variations in crop prices in recent years, agricultural and mining businesses will have to examine how energy prices are effecting commodity prices. The World Bank's report, Placing the 2006/08 Commodity Price Boom into Perspective, stated that these factors are increasingly linked, and may vary with financial speculation.

The 2007 boom in the prices of commodities such as crops, metals and fertilizers was the largest in the post-WWII period, and preceded a drop in global food levels which hadn't been seen since the 1970s. The boom peaked in 2008, when crude oil prices peaked at US$ 133 per barrel (a 94 percent increase) and rice prices doubled in five months.

However, many factors led to the price boom apart from energy prices, including biofuel production, a weak dollar and fiscal expansion.

Fiscal expansion in many countries contributed to high commodity prices. Index funds expanded to include commercial goods in developing countries, so commodities before unregulated became 'financialized'.

The depreciation of the US dollar during the financial crisis strengthened global demand and limited supply, encouraging speculation.

The Bank holds the contested view that increased financial speculation created a 'commodity bubble' when people with 'new' money, encouraged to invest by low interest rates, invested in commodity index funds such as the Dow Jones AIG and S&P Goldman Sachs Commodity Index.

The Bank cited economist Guillermo Calvo who wrote, 'Commodity prices are the result of portfolio shift against liquid assets by sovereign investors, sovereign wealth funds, partly triggered by lax monetary policy, especially in the US'

This is a modification of the Bank's earlier position, outlined in its July 2008 report which blamed an increased demand for biofuels for a 75 percent price increase. Because many governments had signed on to emissions-reducing schemes they were projected to sell much of their crop as fuel instead of selling it as food, this could lead to decreased availability. This was true to a lesser extent than previously thought.

International movements towards clean energy such as biofeul (e.g. increased demand for maize used in the production of ethanol) also affected the price of crops through the decreased allocation of land.

'The increasing interaction between the price movements of energy and nonenergy commodities during the boom focused attention on the impact of growing demand for biofuels, including for maize-based ethanol (mainly in the US)and oilseed-based biodiesel production ' There is a proven inverse relationship between the US dollar and commodity prices such as crude oil, but this is now also true for biofeuls.

"Maize and crude oil prices move in tandem, pointing to an emerging new and fixed relationship between them," the report stated. Agricultural producers and miners were advised to further research the linkage between energy demand and commodity prices.

Responding to questions about whether commodity prices have reversed the downward course that they pursued during most of the past century, the report determined that 'price variability overwhelms price trends'. The report warned against government policies, including export bans and prohibitive taxes, which would aggravate the variability.

Author: Cristina Brooks | Climate Action

Image: Library of Congress | Flickr

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