A French analysis of global commodity prices, as 2010 quietly finishes with record highs
PARIS - Wheat, corn, coffee, sugar, rubber, cocoa, cotton, soy, rice. Each one of these commodities has seen their prices skyrocket this year, some to all-time record highs. The increase accelerated in December, with investors buying with the fever of those who fear shortages, or a more deliberate desire to hunker down for an austere 2011 protected by the guarantee of staple goods.
On the Chicago market Tuesday, cotton to be delivered in March hit a record high at $1.59 a pound. Its price has more than doubled since January, the biggest increase since 1973. The same day, sugar to be delivered around the same time hit prices not seen in almost 30 years, at 33.65 cents a pound, a 52% increase over the year. Arabica coffee went from $1.35 a pound in May to $2.20, hitting a 13-year-high. The day before, rubber blew all records at 411,40 yens a kilogram on the Tokyo market, a 60% increase.
In Paris, wheat for January is selling just under its all-time record (261 euros a ton in 2008), having shot up 70% since January. Corn prices increased by 46% and soy by 28%. The most obvious reason: weather. Too much rain or not enough. There where also some assaults on the market, especially this summer on cocoa, when the British hedge fund Armajaro went as far as owning 7% of the world production.
After this summer's drought in Russia and its consequences on the price of wheat, the new climatic phenomenon threatening commodity prices is the La Nina. It influences the temperature of the Pacific Ocean and often triggers heavy rains in South East Asia and Australia, and droughts in South America. Heavy rains recently damaged the wheat crop in Eastern Australia. Same thing for sugar and rubber. And if abnormal rains are brought into the mix, as in Pakistan and India, then a wide variety of crops are damaged.
But more broadly, the fundamental reasons for the price increases remain the same: a lackluster production incapable of satisfying a constantly growing demand, led by China. The country's growth is 4 times that of Europe. It tried to halt the rise in commodity prices, but the measures that were taken had only a limited effect.
"What is incredible is the contrast in the grain market between the first and second semesters of 2010," says Emmanuel Jayet, director of research on commodities at French bank Societe Generale. "During the first six months, crop estimates were very positive. They were on a downward trend even though prices were high. Record lows in 2010 for corn, wheat and soy were 50 % higher than the 2005 average."
But with the drought, Russia reduced its production estimates by 30%, strongly affecting supply since Russia is one of the world's top producers. Then the US had to revise its predictions, as Australia eventually did as well. "The lesson from 2010 for grains is that the worst can happen," says Jayet.
This upward trend will probably last through 2011. The drought in Argentina could have a major impact on corn, wheat and soy crops. As for the prospects of sugar, it is hard to predict price movement so long as the Indian government continues to withhold information on its forecasted exports.
Read the original article in French