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Commodity Market Outlook

John Baffes's picture

As a follow-up to the January 2013 Global Economics Prospects released three weeks ago, the World Bank’s Development Prospects Group has just published its Commodity Market Outlook. The report notes that following a somewhat volatile 2012, most commodity prices will ease marginally in 2013. Crude oil prices, for example, are expected to average US$102/bbl, just 3 percent lower than in 2012. Agricultural commodity prices are also forecast to decline: food by 3.2 percent, beverages by 4.7 percent, and raw materials by 2.2 percent. Metal prices, on the other hand, are expected to rise slightly but still average 14 percent lower than in 2011. Fertilizer prices are also set to decline, by 2.9 percent, while precious metal prices will increase almost 2 percent.

The 2013 outlook is subject to numerous risks. In regards to crude oil, global supply risks remain from ongoing political unrest in the Middle East. A major supply cutoff could result in prices spiking above US$150/bbl. For metals, prices depend on economic conditions in China, which accounts for almost half of global metal consumption. Metal prices could decline substantially should conditions there deteriorate. On agricultural commodities—most importantly, food—weather remains a key risk. Given historically low stocks, a major adverse weather event would induce sharp increases in maize prices. Wheat prices may come under upward pressure as well. In contrast, the markets for rice and oilseeds are better supplied, and thus face limited upside price risks.

Among other issues, the commodity outlook notes that after ticking upward in 2008/09, commodity price volatility has moderated. The report also highlights the wide divergence in local price movements: for example, despite a 22 percent increase in global maize prices in 2012Q3, local prices fell in 8 of 21 developing countries for the same quarter. Finally, the report stresses the role that higher oil prices have played in the rise in most food prices.

Comments

Submitted by chimaobi okolo ... on
A major oil supply cutoff will drive oil price high. While oil price has relative effect on prices of other commodities, it will have certain implications for oil driven economies. A rise in the price of oil will cause a relative increase in the price of other commodities, including price of food (both for oil producing and consuming states). Oil producing states will benefit from this increase in oil price as more money will run into their coffers. An oil producing country whose GDP is largely dependent on oil will have increased stock of money and in turn inflation (if consumption policy is not effective). Nigeria has been in this situation, where increase in oil price caused a boom and inflation increased alongside expenditure. When supply was restored and oil price reduced, prices of other commodities did not drop immediately and consumption pattern of the people was hard to reverse. The impact on the people was painful and more was driven back to poverty. Also, while the boom lasted, GDP and money stock increased, government and policy authorities were dissuaded from other sources of income and focused largely on oil, making the economy one sector driven. Oil consuming states like USA will also notice a relative increase in prices of other commodities, including food. However, this will not be due to inflation but as a result of scarcity of oil (increase of demand over supply) and while oil price drive the economy, market forces that push oil price will have relative effect on the prices of other commodities. This could give a painful experience to the middle and low income earners period when supply is cutoff. Once supply is restored, business becomes as usual. However, this will be true mainly for economies without alternative and those who do not have precautionary plan. Furthermore, oil is a commodity on the world market and increase in oil price will relatively cause an increase in prices of other commodities on international market that depend on it. Major car companies, air lines, heavy machine producers and others will be affected. I suggest that oil producing states try to foresee the impact of oil price movement and plan for a sustained growth in the economy. While oil price have relative effect on the price of other commodities, its effect on the price of food will be felt more by the low income earners. Therefore, prudent governments should plan to improve agriculture and increase supply of food to its populace. Increase in the supply of food will check the relative effect of oil price increase on food price. Furthermore, middle east countries should be encouraged to seek peace. Organizations like the UN, World bank, and neighboring countries should intervene and calm the unrest in the region. The unrest in the middle east could cutoff oil supply, drive its price high and in turn the price of food. This will worsen the world food security issue and increase hunger, malnutrition and death.

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