Article Series
The Arctic Cold War Looming
The Uranium Merger Mania Pending
The Paradigm Behind Global Trade Protectionism
The Stealth Rally in Mining Mergers
Special Memorial Day Weekend Report
Special Report
The Paradigm Shift of Sky-High Oil
The Truth behind Rising Commodity Prices Worldwide
By George Bell
A new era of globalization is taking the world by storm, one that not only feels the pressure of subprime issues, but also that of rising commodity prices as well. As this article examines, commodity prices are greatly accelerating inflation around the world, something that may not abate in the near term. Only through policy reform and non-protectionist trade reform will commodity prices ease, something that may not happen in the immediate future. At the end of the day, the present commodity boom (through time and price) is outside of the "norm" from anything the world has ever seen.
The Story of Now
On Page 218 of the International Monetary Fund (IMF) April Global Economic Outlook 2008 report, the organization contends, "The current commodity price boom has been broadly based and includes oil, metals, major food crops, and some beverages. Within these groups, price increases during the current boom have typically been well above average, and the period of sustained price increases has been longer than usual."
Before we cover the "length of time" of the present commodity boom, it is important to first note the price changes underfoot. Worldwide, almost every single commodity group has witnessed upward pressure on prices since the turn of the century.
Just take Wheat for example...the spot price has gained almost 170% year over, year, something that simple can't be ignored. Trying to find the cause, in January, Orla Ryan of the BBC penned, "World wheat stocks are expected to hit a 30-year low this year, partly driven by the worst drought in Australia in 100 years, which halved the winter wheat crop to 12 million tonnes in 2007. Wheat prices may come down as farmers shift more acreage to the crop, said Barclay Capital's Mr Horsnell. But ultimately, low inventories, poor harvests and growing demand for biofuels look set to support prices of soft commodities." 1
Amazingly, biofuels are much of the reason for declining crops in some areas, but when one takes into account that according to the March 31, USDA report, corn crops in the U.S. are actually down 8% in 2008. What gives? China; the usual suspect. At one time China was the world's largest exporter of soybean products, however, in recent years the Asian powerhouse has become the world's number one consumer, a significant reason prices are up 106% (measured in tons by the FAO), as of April 2008.
But there's even more to the story. See, government subsidies, industry collaboration and trade tariffs all play a part in crop planting too. Given that countries like Brazil still face challenges when exporting corn to developed countries like the U.S., prices are "protected" within the blistering ethanol trend of America.
And lets just face it, with oil near $100 a barrel and 134 biorefineries presently operating in America, demand for corn isn't going away anytime soon. By the way, adding to the previous number, there are another 77 new biorefineries under construction in the U.S. at this very moment.
The bottom line, unless the U.S. begins to give emerging economies a favorable tariff incentive to export corn to America, the 8% decline in American corn crops in 2008 indicate prices are likely going even higher.
When Will the Bubble Burst?
You might get a little upset with my answer, but in truth: No one knows when the bubble will pop.
Please allow me a moment to tell you why...
The present commodity boom is global, something that bucks the trend of previous historical - region specific - commodity bull markets. What's more, the present commodity boom is longer in duration, with higher average global prices, than ever seen before. Just take a moment to look at the below chart from the IMF update:
Source: IMF World Economic Outlook 2008 - April Update.
Do you see it? In the case of oil, the present bull market has lasted more than three times longer than previous booms, with prices four times greater than the historical mean. The rally in soybeans has been twice as long, and double the historical price increase. Fact is, statistically, we are way out there on the Gaussian curve, and the commodity boom could keep on going...
The IMF says, ""In sum, the comparison of the current commodity price boom with earlier ones suggests that the current boom has been more broad-based and longer lasting and that prices have risen by more than usual. This suggests that the current boom reflects a confluence of mutually reinforcing demand and supply factors, as well as the effects both of increasingly important links among commodity markets (such as between the prices for oil and food and the production of biofuels) and of supportive financial conditions, including U.S. dollar depreciation and low real interest rates (see Appendix 1.2 for details).
Some of these factors obviously played a role in earlier booms as well. In the 1973 boom, for example, commodity prices were pushed up by the combination of very strong global growth and U.S. dollar depreciation.
However, the current boom is characterized by the extended period during which these factors have interacted. As a result, the prospects for global commodity markets depend importantly on how long these underlying, mutually reinforcing forces continue to prevail."
Here's what I would like to offer readers from all of my years as a CEO: When global GDP starts to recover, the U.S. dollar starts to turn around...that's the point where commodity bulls probably need to stop an take a moment to reevaluate the commodity situation. But there's one other "wild card" looming: Global Warming. Increased global temperatures and erratic weather patterns are never good for agriculture. And right now, the threat of global warming has never been greater, but then again, neither has the cost of putting food on the table for the average consumer.
1Commodity boom continues to roll. Orla Ryan Business reporter, BBC News Wednesday, 16 January 2008, 00:06 GMT http://news.bbc.co.uk/2/hi/business/7171308.stm
Copyright 2007 © UNOR Inc.
LIMITED LICENSE
Permission to use the Information available within the UNORINC.com website is granted for all media redistribution uses, provided that no Information available from the UNORINC.com website is modified in any way.