Two stories in Monday's Wall Street Journal provide evidence of a changing perspective on commodities by the world's most influential business daily.
Now that bushels of corn have soared to new heights and copper ($3.50/lb. - Yikes!) looks like it is again the real deal in 2007, the price of stuff that is either grown, dug, or pumped out of the ground is getting pretty hard to ignore.
It must be that old supply and demand thing.
In Crop Prices Soar, Pushing Up Cost Of Food Globally($), the shift away from oil to much less efficient corn-based ethanol seems to be having an impact on the price of corn-based food.
Soaring prices for farm goods, driven in part by demand for crop-based fuels, are pushing up the price of food world-wide and unleashing a new source of inflationary pressure.
The rise in food prices is already causing distress among consumers in some parts of the world -- especially relatively poor nations like India and China. If the trend gathers momentum, it could contribute to slower global growth by forcing consumers to spend less on other items or spurring central banks to fight inflation by raising interest rates.
Politicians in markets where food costs are a particularly sensitive matter are moving to counter rising prices before they take a bigger economic toll or fuel unrest. But it remains unclear whether those policies will be enough to contain the current pressures, or whether a longer-term bout of food-price inflation -- similar in ways to the recent climb in prices for oil and other commodities -- is in the offing.
One of the chief causes of food-price inflation is new demand for ethanol and biodiesel, which can be made from corn, palm oil, sugar and other crops. That demand has driven up the price of those commodities, leading to higher costs for producers of everything from beef to eggs to soft drinks. In some cases, producers are passing the costs along to consumers. Several years of global economic growth -- led by China and India -- is also raising food consumption, further fanning the inflationary pressures.
Not surprisingly, much of this can be traced back to the global housing boom that took off about five years ago that spurred demand for raw materials from exporting nations to manufacture and export to consumers in the West who didn't really the need the stuff or have the money to pay for it.
Rising home prices and easy access to home equity worked out very well for just about everyone concerned until energy prices began to rise, and then metal prices - now agricultural commodities are rising.
If only some giant oil-field could be discovered (preferably somewhere in the continental U.S.) and we could all go back to the 1990's endless supply of cheap energy.
Global grain stocks are at their lowest level in 30 years, after several years of strong global economic growth, and could become even tighter if farmers divert more crops to make ethanol or other fuels. By some estimates, about 30% of the U.S. grain harvest is likely to be devoted to ethanol production by 2008, up from 16% in 2006.
All of this puts the world's central banks in a bind. Although they have confronted spurts in energy prices, many of them haven't had to cope with prolonged increases in food prices since the 1970s. Since then, food-price inflation has remained relatively benign, even as incomes world-wide have climbed, allowing consumers to beef up their diets.
In more recent years, central banks have tried to ignore surges in food prices as long as they didn't get too out of hand, mostly because they tended to be short-lived. A change in weather, for example, could quickly turn a food shortage into a glut, sending prices tumbling.
But since the 1970s, the Federal Reserve and some other central banks have come to believe that they can avoid raising interest rates in the face of transitory increases in food and energy prices if they have established enough credibility as inflation fighters to keep such price increases from spilling over to the rest of the economy.
That's always been the problem with fighting the symptom of the problem (rising prices) rather than the problem itself (too much money and credit creation).
Oh well, live and learn.
In Why China Need Not Fear U.S. Economic Slowdown($), the case is made for continued demand for commodities from China regardless of what happens to the U.S. economy.
If the U.S. economy weakens further, as many now worry it will, China would seem to be vulnerable.
About a fifth of China's exports go to the U.S., its biggest single foreign market. And those shipments have been a major driver of China's fast growth: China's total exports have been rising by about 30% a year for the past five years, and are equivalent to roughly a third of the annual economic output of what is now the world's fourth-largest economy.
Yet barring a major collapse in the U.S. and world economy, there are good reasons to believe China could weather slowing demand from the U.S. Most economists are penciling in a possible loss of just one or two percentage points from China's recent annual economic growth rates of 10% or more.
"China's exports may continue growing even if the U.S. slows down, because of the high competitiveness of Chinese exports," said Milan Brahmbhatt, the World Bank's lead economist for East Asia. He notes that challenges like a stronger currency and weaker demand usually push Chinese exporters to upgrade quality and productivity so that they can maintain growth by taking market share from others.
And while exports are important, China's expansion is flying on more than one engine. Much of its boom has come from massive building of new factories, highways and housing. While some investment does go into export manufacturing, more than half of such spending last year went to housing and infrastructure -- the kind of investment that serves local demand, and doesn't depend on the vagaries of U.S. consumer spending.
"China seems to be an outlier in terms of having its own independent cycle. This is happening because of the primary importance of fixed-asset investment in China, which seems to be autonomous," said Ifzal Ali, chief economist at the Asian Development Bank
In each of the last three or four years, pundits have been predicting a slowing economy in China and lower prices for energy, metals, and agricultural products.
So far in the new year, it's looking like the lower energy prices of 2006 were the exception and not the rule.