2010 was a great year for commodity investors. Not so good for the consumers of those commodities. Prices for a broad range of commodities—everything from corn to copper to cotton—jumped sharply. Critics of the Federal Reserve’s monetary policy blamed “quantitative easing” for the run up in prices. Others were quick to blame speculators.
But as New York Times columnist Paul Krugman, the Nobel Prize winning economist, wrote yesterday, “What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices.”
Commodity prices are inherently volatile. It’s easy to read too much into the daily, weekly or even monthly fluctuations. Historically, a big surge in the price of wheat or copper would incentivize production, resulting in lower commodity prices. As the old adage goes, “The best cure for high prices is high prices.”
But for some commodities that old adage may not apply any longer. Big jumps in oil prices, for example, no longer generate big jumps in oil supply. Indeed, as Krugman pointed out yesterday, conventional oil production has been essentially flat for four years, even though the price of oil is back to nearly $90 per barrel.
Even more worrisome, however, is the trend in farm commodities. Prices for wheat and corn this year jumped about 50 percent, while cotton prices have doubled in the past six months. Soybeans are up about 40 percent this year.
In times past, when the price of wheat has soared, farmers have planted more wheat, and cutback on corn, soybeans or other crops. But when farm commodities are rising across the board, that kind of substitution doesn’t take place. It’s yet another sign that we are living on a finite planet.
Krugman did not ring any alarm bells. He was careful to say that the world was not descending into “a Mad-Max-style collapse.” But if the recent surge in commodity prices is a reflection that we are living on a finite planet, what will commodity prices—and the world—look like in 30 or 40 years when we could have close to 9 billion people on the planet? What will happen to commodity prices in 2040 or 2050 if the world economy is several times larger than it is today, and the demand for cotton, corn, and copper all that much higher? What will happen when the world’s demand for cotton and biofuels collides with the need to feed a hungry planet? I guess we will find out what it’s like to live on a finite planet.
Posted by Robert J. Walker, Executive Vice President