Commodity price volatility accelerates

Last Updated 15 March 2011, 16:50 IST

Commodity producers are again reaping the benefits of high growth, particularly from high-demand importers, like China, and are increasingly formalising their integration into global commodity value chains. There is a growing recognition that, properly managed, resource rents can provide an important tool in the fight against poverty.

At the same time however, there are serious concerns about the way in which commodity markets have been evolving in recent years. Since mid-2010, commodities have, for the second time in 3 years, been experiencing extremely high price volatility, which is exacerbating problems for producers, traders and consumers.

Volatility is an inherent feature of dynamic commodity markets, but the magnitudes we have recently seen point to speculative distortions, especially in oil, that can complicate the economic management of production and trade, in terms of the degree of exposure to risks and the uncertainties created for investment. Moreover, such volatility has huge negative impacts on vulnerable groups, such as low-income households in developing countries for whom food expenditure can account for up to 80 per cent of household budgets.


Prices for copper, for instance, have risen 35 per cent since the summer, and gold, sugar, and cotton all at 30 year highs. Recently, FAO’s agricultural commodity index touched just one point below its maximum level reached in 2008, clearly signaling that the 2010-11 price hikes are similar in magnitude to 2008. Certainly, some features of the current episode of high prices remain unchanged from the first episode in 2008, such as the role played by the financialisation of agricultural commodities and the activities of some commodity funds, which seek to manipulate prices.

Nevertheless, other features are different and we should be careful to distinguish what might be distinct about the current boom. Last year witnessed several major weather events, from floods in Pakistan to fires in Russia and drought in other areas of the world, which have, for example, had a major impact on the prices of wheat and cotton. It is still open to speculation whether such events are related to climate change but the balance of evidence points to the increasing impact of climatic changes on agriculture. What is beyond doubt, however, was that short-sighted policy responses by some governments, including their use of export bans, exacerbated the price rises.

Commodities continue to provide the largest source of revenue and employment for dependent countries and their principal source of foreign exchange. Agriculture provides livelihoods for 2.3 billion people globally, mainly on poor, rural, smallholder farms, often with a high participation rate of women. However, as countries seek to rebuild from the economic crisis of 2008-09 and establish job-creating growth, one should perhaps be careful to distinguish between agricultural commodities that have a higher labour intensity from many non-agricultural commodities. Countries must pay further attention to this feature of growth in the commodities sector as they seek to innovate and diversify both within the sector and away from it, for example into higher value stages of the global commodity value chain or into related industries.

Despite a contraction in commodities trade and a fall in prices in 2008-09, the historical trend is towards increasing demand, especially in high growth areas in the developing world, which have been one of the main drivers of the commodity economy in recent years. Meeting that demand in a sustainable manner, whilst ensuring a sufficient and predictable supply, poses significant challenges. Ensuring such a predictable environment is also needed to address the acute problems of food and energy security, especially in environments of extreme poverty with the potential for social and political unrest. An increasing, and increasingly young population in the developing world, coupled with what has so far been a jobless recovery and a lack of social protection in many of these countries, will not easily withstand future price rises.

Commodity booms and busts have been a regular feature of international commodity markets for generations. However, the recent emerging phenomenon of the co-movement of all commodities has started to place certain policy restrictions on countries, in terms of their efforts to diversify their commodity sector. When commodity resources and markets are well managed and regulated, risks such as price volatility and commodity dependence can be lessened.

It is essential to mobilise support and dialogue between high-level policy makers, business leaders and other commodity economy experts.


(Published 15 March 2011, 16:50 IST)

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