Globalist Analysis

When Commodities Revolt

How are increasing commodity prices challenging economic policies around the world?

Takeaways


  • Commodities will continue their rampage for the foreseeable future. They are now empowered.
  • All of this leads to the overriding impression that 2008 is the year when everything ran out all at once.
  • When prices collapse, as the oil price did in the 1980s, investment stops, guaranteeing new shortages in the future.

There have been food riots from Egypt to Haiti. And for the first time since the 1970s Americans are cutting back on their energy use.

Meanwhile, speculative money is pouring into exchanges that trade commodities, such as the New York Mercantile and the Chicago Board of Trade.

After World War II, countries breaking with their colonial past, or just with their own bad history, came to believe that because they were rich in raw materials and agricultural commodities, they would prosper.

There was no shortage of globe-trotting professors and other consultants telling the developing world that it would grow rich on whatever it had.

The list was as long as it was disingenuous — palm oil from Malasia, cocoa from Ghana, cotton from Egypt, copper from Zambia, wool from Australia and beef from Argentina. Oh, throw in diamonds from South Africa.

But the biggest commodity grab was to be oil from the Middle East. Here, the price was largely set by the companies that found and produced the oil with only a modest payment in acknowledgment of whose oil it was.

But nothing has solved the fundamental problem of commodities. It is this: shortage overstimulates them in the market — and oversupply reduces them to penury.

It is this awful volatility that has led governments to regulate agricultural markets with subsidies — and caused even a geostrategist such as Henry Kissinger to talk about the need for floor prices for oil. When prices collapse, as the oil price did in the 1980s, investment stops, guaranteeing new shortages in the future.

Advanced countries, going back to British colonial practices in the 17th and 18th centuries, largely insulated themselves from producer boom-and-bust by controlling the adding of value to raw materials.

India could produce cotton, but it would be woven in Manchester. Ceylonese tea would be blended not in South Asia — but in England. And oil would be cracked in refineries far from where it was produced.

Yet the postwar propaganda about commodities affected even sophisticated countries, notably Australia. Japan boomed while Australia languished, all the time selling its products to the Land of the Rising Sun. Then Australia woke up, as did Chile and the oil producers. Brazil decided it would join the manufacturers, too.

Now, the game has changed.

A great new force has been unleashed on the world. The new rule of add-value at home, even buy commodities to do it (see the case of China), has caused an unprecedented growth in the middle class in the emerging prosperous world. India and China between them can claim a middle class larger than the entire population of the United States.

This year, this phenomenon overwhelmed the commodity sector because the middle class around the globe wants the good things in life from cars to coffee, beef to wine — all in apartments with hardwood floors and air conditioning.

To worsen the situation of food supplies, Europe has had disastrous flirtation with biodiesel, and the United States is diverting corn to ethanol production. All of this leads to the impression that 2008 is the year when everything ran out all at once.

Of course, governments are always ready to make things worse. The Japanese government is sitting on a mountain of rice bought from the United States for diplomatic reasons — but not wanted in Japan. Releasing this would help for two years.

Argentina, whose farmers were hoping to share in the boom, is about to put a tax on grain exports, which is more likely to reduce planting than to protect domestic consumers. And Vietnam, something of a rice basket, has restricted exports.

The United States also is not helping. It could ease the pressure on corn by importing surplus ethanol from Brazil where it is made from sugarcane. Too easy. The United States treats ethanol as a manufactured agricultural product — and imposes stiff tariffs.

Commodities will continue their rampage for the foreseeable future. They are now empowered.

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