Commodities: Entering a new era?

  It has always been believed that a generous supply of commodities is not necessarily good for a country’s economy. People even talk of the «curse of oil wealth», as it is sometimes called, to explain that oil-rich countries are often at the tail-end of development (with notable exceptions, of course). In fact, a good number of the more advanced economies on the planet are not in that category because they are rich in natural resources but because of their efficiency when it comes to combining production factors and developing new technology and products.

  From a more empirical point of view, the earlier intuition turns out to be true, given that in the past century commodity prices have tended to drop in relative terms against prices of manufactured goods. This trend is due to various factors. First, demand for commodities is tending to grow less than the world economy. In other words, economies are now less dependent on commodities than 100 years ago. In addition, improvements in efficiency and productivity constantly being introduced in the manufacturing sector and services, that make it possible to raise wages and benefits, are not taking place at the same pace in agriculture or the extraction of commodities. Furthermore, the latter tend to be homogeneous products with little margin for differentiation.

  Nevertheless, for some years now all these ideas seem open to question in view of the sharp rise in commodity prices. This rise went far beyond the usual volatility of these products and forces us to ask if this is a fundamental change or are we facing a more or less ephemeral parenthesis before they go back to historical trends.

  Some observers feel that we are facing a new paradigm of long-term trends and that the «culprits» are the emerging countries, with China in the lead. If these low-income, high-population countries are able to maintain the economic success they have enjoyed recently and advance rapidly to the level of well-being of the more developed countries, their needs for consumption of commodities (both agricultural and industrial) are going to be enormous. That is to say, demand has suddenly risen and the problem now is supply. In recent years, China has absorbed practically the entire increase in world consumption of industrial commodities. What is more, it is forecast that shortly after 2010 China will be the world’s biggest energy consumer and that, along with India, will be responsible for 45% of the increase in energy demand up to 2030. Development will also mean changed consumer patterns. The rice diet will lose importance while meat, eggs and milk products will rise. What will be the result? Growing demand pressure for these products will also mean an increase in prices for commodities such as cereals and milk products. If we add to this the boom in biofuels, we can better understand the wave of price increases in commodities.

  Whether these price increases are lasting or not, they still need to be explained. In any case, as a reaction to high prices, the search has sharpened for alternative materials and new technology that will allow supply to meet these new needs. An undoubted fact is the financial power the rise in commodity prices has given producers in recent years. The examples of Russia, which in a short time has become the third leading country in terms of foreign currency holdings, and the so-called sovereign funds of the oil-rich countries coming to the rescue of large financial institutions, clearly show the change that has taken place in the world of commodities.

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