Commodity Prices Rising 2011 – Commodity Definition, Emerging Markets Driving Demand

by Dan Harrington on March 30, 2011

World Commodity Market Report: Explanations of Commodity Price Increases Due to Rising Demand, Supply Concerns, and Infusions of Money Into Commodities Futures Markets

Why are the primary factors behind the spectacular commodity price increases across the board during the last year and still going strong? Increasing worldwide demand is one reason, though other factors have come into play fueling the price spikes in commodities.

A Bit of History About Commodity Rallies

During the summer of 2008 a commodity rally peaked and then began to  decline rapidly in what was known as the panic of 2008. Commodities bottomed out in December of 2008 soon after the U.S. Federal Reserve initiated their first phase of quantitative easing.

Since that time commodities have been going up, and in the last year they have been surging across the board. This is due in no small part to speculation trading on commodity futures markets that has further driven up prices.

Easy Money Policies Lead To Infusion of Money Into Commodity Futures Markets

The trading strategy by Wall Street firms, hedge funds and banks to borrow money at low interest rates in one country and then invest it in another country at higher rates unraveled in the financial crisis of 2008 resulting in the selling of commodities.

When the quantitative easing was announced (November, 2008) it began the surge in commodity prices that continues today with some commodity indexes already exceeding all time highs.

Agricultural commodities (e.g., cotton, sugar, soybeans, wheat, rice, coffee, corn), energy commodities (e.g., oil, natural gas), precious metal commodities (e.g., gold, silver, copper) have all seen steep price increases. Coffee prices recently hit a forty-year high, cotton prices have spiraled upwards, and the list goes on from pork to wheat to beef and sugar.

Commodity Prices Rising 2011 – Commodity Definition, Emerging Markets Driving Demand continued:

Quantitative Easing Leads To Higher Commodity Prices

When the Fed accelerated its quantitative easing at the beginning of 2009 there was also an acceleration in the rise in commodity prices.

The easy money policies of the U.S. clearly fueled the bull market in commodities, but what remains to be seen is if a bull market can continue now that prices are already so high.

Commodity Definition continued:

Strong Commodity Markets Expected To Continue In Wake of Quantitative Easing

When the current round of quantitative easing, known as QEII, comes to a conclusion the demand for commodities is expected to remain relatively strong assuming the economy continues on a pattern of growth.

The overriding question is whether QE and QE II have accelerated commodity prices high above what normal supply and demand issues would have dictated without the “easy money.” The answer to the question will be answered imminently in the summer of 2011.

The infusion of large amounts of money into commodity markets certainly exacerbated the steep price rises at the end of 2010 and into 2011.cas

Fundamental Shift in Commodity Markets Due To Supply and Demand Issues

Cautious investors at this stage realize that there many be a fundamental shift in the trading end of the market, though with the volatile state of world affairs, decreased harvests and numerous other supply problems, the end of a bull market in commodities is not something most investors subscribe to yet.

Emerging Markets Driving Strong New Demand In Commodity Markets

The rise in demand by emerging markets including China has put supply pressures on a range of commodities from cotton to coffee. Tight supplies also have led some countries such as India and Russia to impose export restrictions, further driving up prices.

Emerging economies including Latin America, China, Brazil, Russia and India all have quickly growing middle classes with more disposable income and the are a major contributing factor to the fundamental shift in commodity markets with increasing demand for a whole range of products from coffee to oil.

The GDP growth of Indonesia in the last quarter of 2010 was almost 7%.

Commodity Prices Are Rising in 2011 – An Explanation of the Commodity Definition and Emerging Markets Driving Commodities Demand

Inclement Weather Hurting Agricultural Commodity Supplies

Many areas have been hit by flooding in the last year, harming crops and create more upward price pressures. Decreased coffee harvests in major coffee growing regions like Colombia, Brazil and numerous other countries have been a major factor in the recent steep rises in coffee prices.

Depleted Stockpiles Create Tighter Commodity Supply Chain

In agricultural markets world stockpiles are severely depleted which creates a tighter supply chain and makes markets more vulnerable to price spikes in response to supply disruptions.

If farmers can realize better harvests and stockpiles can be replenished the situation will ease, but few industry analysts see this occurring any time soon due to continued concerns over inclement weather and other problems affecting crops.

Even with bumper crops prices would likely remain high due to low stockpiles.

Agricultural Commodity Supplies Expected To Continue To Struggle Keeping Up With Demand

Higher prices have provided incentive for growth though it remains unclear to what degree new investments will arise increasing production.

During the years of the fiscal crisis and economic downturn there was a decrease in investment in infrastructure and new technologies so there may be a lag time in any real recovery to lower supplies, despite the motivation now provided by the steep price increase in commodities.

9.8 million acres of additional land is expected to be planted in 2011 in the United States, according to the USDA, which is a 4% rise from 2010.

Commodity Markets In 2011 and 2012

Regarding commodity markets overall, while there is certainly much room to move now on the downside, strong upward pressures on prices could be maintained by a variety of factors, not the least of which is that even if supplies increase demand is increasing right along with it, and by most measures outpacing it handily.

The cotton shirt you buy off a store shelf today is likely made with cotton that only cost half of today’s cotton prices. This means that very soon either the price tag in the store will go way up or the shirt will be made of something other than cotton.

This is just one example of the effect of rising commodity prices which work their way through to the consumer inevitably.

Also spiraling upward have been corn prices, more than doubling in a year, and this translates directly to higher meat prices due to an increased cost of livestock feed. The steep rise in oil prices is affecting all other commodities as well.

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