How Commodity Prices Are Hurting Global Economies

Commodities seem to be on a bull run which is inversely related to the overall economy. Everything from oil to rice has skyrocketed over the past years, and companies and countries are falling victim to the inflationary effects of these higher prices.

One of the latest companies to fall victim is low-cost carrier Skybus, which is closing down and plans to file for bankruptcy citing high oil prices as the main reason for its insolvency. They started only around a year ago and oil prices were already high then, so they probably should have planned accordingly. ATA and Aloha Airlines will also stop flying this week, citing similar issues.

Food prices have also continued to rise prompting authorities in China, Egypt, Philippines and other countries to take actions to try to prevent a crisis by curbing exports on rice and in some cases raiding warehouses to prevent “hoarding”. Rice has doubled since last year and gone up over a whopping 500% since 2001. The World Bank said that 33 countries may experience unrest due to the continuing rise of food and energy costs.

These days, the Fed faces the risk of stagflation as it continues to lower interest rates. Treasury bond traders believe rate cuts may be over soon and yields have increased slightly over the past month. Most attribute this to the Fed’s support of JP Morgan’s (JPM) takeover bid for troubled Bear Stearns (BSC)

The big question, though, is how much longer can the Fed continue to lower interest rates with commodity-based inflation continuing? Interest rate hikes are probably not the best way to tackle this form of inflation, especially with the housing market still in decline and the Reis study showing strip-mall vacancy rate is at its highest in over 12 years. Not to mention of course, the continuing credit market crisis and the lack of liquidity in many credit markets.

Comments

[TraderMark:]

<<The big question, though, is how much longer can the Fed continue to lower interest rates with commodity-based inflation continuing?

Answer: As long as the sheep in the country don't educate themselves on what is being done to them to (cough) "help" them.

Just keep listening to the party line - inflation subsides in 2nd half 2008. That is, if there were any inflation today. Which there isn't. Of course..

2008 Apr 07 07:44 PM

[LJ:]

The agricultural commodity prices depend not only on monetary policies, but also on weather. Right now, many farmers in China or Vietnam earn no more than US$15 per day. With such a low income, they have to work continuously for three years before they can afford an Apple computer. This is unfair not only for them, but also for any international company wishing to expand its presence in the developing economies.

I believe we are living in a different era. Perhaps, it is a time for the low-paid farmers to get rich.

2008 Apr 08 01:14 AM

[hugoh:]

"Commodities seem to be on a bull run which is inversely related to the overall economy."

Your premise is that commodities are not a component of the overall economy. However, commodities are part of the economy, the basic materials from which everything is built. If you mean commodity values are inversely related to stock valuations or mean to address currency fluctuations, it would help to be address those issues directly. A pricing variation in materials is not an external force upon the rest of the world.

2008 Apr 08 08:07 AM

[User 132383:]

Excellent point.

I agree that interest rate cuts are only a short-term answer. The real solution lies in public and private support of new technologies and other innovations.

For example, we desperately need to find ways to recycle our resources. Recycling needs to begin with the manufacturing of the product and end of its useful life. There are many new and good jobs to be found in this approach. Europe is already heading in this direction.

Also, there is so much to do in the energy sector - capturing new sources, distribution, more efficient use, etc.

Think of all of these possibilities and then look at how this country is stuck in the mud, thinking that interest rates and the money supply are the silver bullets that will get us out of this mess.

2008 Apr 08 10:50 AM

[keo:]

Not all economies are hurt, obviously commodity-producing countries are doing great. Canada, australia, brazil, argentinia, a number of arab countries are making tons of money. Commodities were way too cheap in the 90ies, so supply went down. Now, with higher prices, production will grow and prices will go down again (unless you believe in peak everything). Normal cycle.

2008 Apr 08 12:05 PM

[bearfund:]

Unless I believe in peak everything? Well, let's see - centuries ago there were a few hundred million humans and they used only a small part of the planet's arable land, were unaware of coal, oil, and gas, and worked mines that were accessible and yielded hig-grade ore. Today, nearly all arable land is under the plow, including a good many marginal plots, we're drilling for oil and gas in 1000m of water and then some with virtually every major "easy" field peaking or in decline, and there are 7 billion people alive. More of them than ever are exiting the "poorest of the poor" level, eating more and better food and gaining access to clean water and medicine. Climate change is a reality at high latitudes no matter what you think about "global warming" and the consequences are almost entirely unknown.

So tell me, then, amidst that backdrop: exactly where do you see more supply coming from? More Monsanto-style agritech? Solar energy? A massively rich oilfield we haven't discovered yet? Better farm yields at high latitudes? Sorry, I don't buy it. There will be fluctuations, there will be some demand destruction, and there will be some marginal increases in supply here and there, but the overall trend is inescapable: we've reached our planet's carrying capacity. Any increase in the resource-intensiveness of lifestyles will have to be met with higher prices (and therefore less money for other things), decreases in the number of humans, or dramatic and unforeseen technological advances. Or, you know, miracles. I guess that's what you shorts are expecting?

2008 Apr 09 01:02 AM

[keo:]

More monsanto style agritech ? Yes maybe. Solar ? Perhaps. New Oilfields ? Who knows. Better farm yields ? Well, why not ?

I see the problems you mention. We are getting out of a long bear market in commodities. Low prices formed no incentive to search for new resources. Companies did not invest in searching for oil for example. No new mines were opened. There was no money to be made. The situation is now changing.

I am not short in commodities. In fact, I have quite a lot invested in commodities (mainly using the RICI products). I believe in cycles. The commodity cycle is not over yet, but it will not last for ever either.

2008 Apr 09 02:43 AM