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|Are we Heading for Another Global Primary Commodity Price Surge?|
|C.P. Chandrasekhar & Jayati Ghosh|
Well before the financial crisis broke
out so violently in the US and caused ripple effects all over the world,
most people in developing countries were already reeling under the effects
of dramatic volatility in global food and fuel markets. In 2007 and 2008
prices of most primary commodities first increased very rapidly, to a
degree that was completely unwarranted by actual changes in global demand
and supply. Then they collapsed, from peaks in May-June 2008, at even
more rapid rates than their previous increases. But in many countries
the fall in global prices was not associated with a fall in prices paid
by consumers, while the actual producers (such as farmers) rarely benefited
from the price increases.
Chart 1 shows that global food prices, which nearly doubled between June 2007 and June 2008, fell very sharply thereafter and were back to the June 2007 level by December 2008. But thereafter they have been rising once again, such that the increase between December 2008 and November 2009 has been more than 16 per cent on average across all food commodities. Agricultural raw materials prices did not rise as quickly and fell more in the second half of 2008, so their recent price increase has been sharper, close to 35 per cent in the seven months between May and November 2009. But this means that they are on average only just back to the level of two years earlier.
Other non-agricultural primary commodities - metals
and other industrial inputs, showed less price increases during the 2007
commodity boom, more volatility over the course of 2008 and sharper falls
thereafter, so that by the beginning of 2009 their prices were below those
of January 2006 (Chart 2). But these prices have exhibited particularly
pointed recovery since then, increasing by more than 50 per cent in the
case of metals between March and November 2009, and by 43 per cent in
the case of other industrial raw materials.
Why is this happening? And what does it portend for
the future? It was noted earlier that the recovery in most primary commodity
prices actually predated the global output recovery. As was the case in
the previous price surge of 2007-08, these recent price increases are
unlikely to be related to any real economy changes in demand and supply.
Despite some supply shocks in particular crops, according to the FAO most
agricultural goods in 2009 showed approximately the same demand-supply
relationships that existed in the previous years, with no force making
for any significnt upward or downward price trend. So if prices are increasing,
it must be because of the effect of expectations combined with heightened
speculative activity in commodity markets, especially in commodity futures.
As Charts 4 and 5 indicate, the value of OTC (over the counter) futures
contracts in both gold and other commodities has tended to track spot
price movements. Since OTC contracts do not occur in regulated exchanges
(and in any case effective regulation that would constrain speculative
activity in commodity futures is not yet in place in any of the major
financial centres) such activity still has the potential to cause wild
swings in commodity prices that are not justified by any fundamentals.
|© International Development Economics Associates 2010|