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Sunday, October 19, 2008

Commodity prices come crashing down

Record Harvests, Recession Fears Drive Downward Spiral

As the dark clouds of an economic slowdown gather over the world, the prices of most primary commodities are sliding worldwide. Only a few months earlier, prices of many key commodities, like foodgrains, crude oil and metals, had reached dizzy heights. Now they are in a free fall.
    Wheat had touched $481.5 per metric tonne (pmt) in March, while rice zoomed up to $772 pmt in May this year. These were all-time highs, causing riots to break out in over three dozen countries and a global uproar. At the end of the first week of October, wheat prices had tumbled by nearly twothirds to $272 pmt, while rice prices nearly halved to $412 pmt, according to latest data released by the Food and Agriculture Organisation (FAO) of the United Nations. Other agricultural commodities too have seen a slump. Soybean prices have gone down from a peak of $586 pmt in July to $371 pmt and palm oil from $1,249 pmt in March to $885 pmt.
    According to the latest FAO estimates, the main reason behind this dramatic across-theboard decline is record harvests in most crops. World cereal output touched 2.2 billion metric tonnes, a new record, and 5% more than last year. Wheat production increased by about 11%, fed by a phenomenal 25% rise in Europe. It could have been more but for declines in Argentina, Turkey, Iran, and a less than expected rise in the Australian harvest. Rice production too has increased by 2% over last year's record harvest. China has reported a record soybean harvest.
    While increased availability has eased prices, future increases cannot be ruled out for two reasons—the balance between global production and consumption continues to be poised on a razor's edge, and latest sowing data indi
cates a decline in the area covered under wheat in the Western countries. So, while the world may benefit from the downward trend in the near future, prospects in the middle term are not too rosy.
    Meanwhile, crude oil prices, which had set a blistering pace throughout last year and the first half of this year to reach an all-time high of $147 per barrel in July, dipped dramatically to $69 per barrel on Thursday. That's a decline of more than 50% in three months. A different set of factors is working here. Demand is declining due to the economic slowdown and fears of an allconsuming recession.
DOUBLE-EDGED SWORD
    According to the Short Term Energy Outlook released last week by the Energy Information Administration (EIA) of the US government, oil consumption in the advanced countries covered under the OECD is expected to fall by over 1.1 billion barrels per day in 2008.
    In the US, which consumes 24% of the world's oil, daily consumption has remained at 18 billion barrels per day, which is the 1999 level. This is a direct result of the downturn in manufacturing activity and cost cutting by families facing a financial crunch. Output from factories, mines and utilities has dipped by 2.8% last month in US, the most since 1974, according to Bloomberg.
    Less noticed, but key to driving worldwide inflation are metal prices. Gold prices have risen steeply as jittery investors withdrew from risky markets and sought safe havens following the housing bubble burst last year. In the first quarter of this year, gold touched a record high of $927 per ounce.
    But, that too

Commodity price
fall boon & bane for poor nations

slipped to about $830 per ounce by September. Cop
per rose to $8,443 pmt in the second quarter this year, but it is now selling at $6,991, a decline of over 17%. While iron ore prices have largely remained static this year at around $140 per dry metric ton, this actually represents a slowdown in a six-year-long price surge.
    Experts say that prices will dip by next year as demand slows down. The World Bank's steel products price index rose continuously over the year to a high of 342 in August but dipped marginally to 338 in September. These declines in metals too are a direct consequence of the economic slowdown as it ripples across the world.
    Falling commodity prices have major implications for underdeveloped countries — they are a double-edged sword. While food prices going down helps in fighting hunger in food-deficit countries, crashing primary commodity prices also means less incomes for farmers and miners who export them to developed countries. Since the US and EU constitute a huge chunk of the global economy, the recession there is effectively exported to the third world through declines in commodity prices and job losses.

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