UNITED STATES (March 9, 2011) – World Commodity Market Report. As commodity and food prices continue to spiral upward many people are wondering what is causing the steep price increases for the world’s commodities. Gold, oil, corn, wheat, rice, coffee and many other commodities have been surging upward in price.
In 2010 gold shot up 30% and kept climbing. Cotton rose 89% and kept rising. Corn went up 52$ and kept going up.
Together rice and wheat climbed 26% from June to November of 2010, and yes, kept climbing.
Here are the five main reasons commodity prices are increasing:
Emerging Economies Creating Structural Change in Commodity Markets
The world’s developing nations and emerging markets – including Latin America, China, Brazil, Russia and India among others – are creating a huge new demand for commodities which is putting pressure on supplies and driving up prices.
These countries have increasingly large middle class populations with more disposable income and an increasing rate of consumption for products just a few years ago they would not have bought.
For example, these countries have shown a rapidly increasing demand for specialty coffee (e.g., of the Arabica coffee bean varietal) including espresso coffee drinks such as a cappuccinos and lattes.
These emerging economies are now competing with Europe and the U.S. for the finest coffee beans creating higher Arabica prices and a worldwide shortage of Arabica beans.
One telltales sign that is greater demand driving up commodity prices is that they are virtually all going up at the same time, in part due to a growing world population.
When it is merely supply that is the problem it is typically an industry-specific situation. This is also going on in coffee markets due to poor coffee harvests in Colombia, Brazil and other major coffee growing countries.
Why Commodity Prices Are Increasing in 2011 – Rising Commodities continued:
Supply Disruptions Cause Rising Commodity Prices
Concerns about drought in China and floods in Australia as well as other supply disruptions are further driving up commodity prices. Natural disasters in the last year have included floods as well as fire and droughts. A bad wheat harvest in Russia in 2010 was caused by drought near the Black Sea.
In Latin America it was the heat and dryness that harmed the wheat, corn and soybean crops. In the U.S. crop yields were down 7% and in Mexico a deep freeze hurt the corn and tomato crops. Currently there is a worry about the wheat harvest in the southern Plains states enduring dry weather.
Also disrupting supplies and exacerbating the commodity price rises have been the export bans that have been imposed by some countries to preserve their own food supplies and protect against inflation. India’s onion export ban and Russia’s wheat export ban both had affects on the commodities markets.
Rising food prices are exacerbated by the fact that around one-third of the corn crop in the United States goes to make ethanol.
Weakening Dollar and Inflationary Worries Driving Up Commodity Prices
During the financial crisis of 2008 the United States began taking huge new amounts of debt which, along with a weakening economy, has lowered the relative value of the U.S. dollar as compared to other currencies.
This is occurring in an economic environment infused with inflationary fears due to the rise in energy prices and other commodities. Adding to concerns are the easy money policies of the U.S. Federal Reserve and their efforts to hold down interest rates and supply cheap credit.
2011 Commodity Prices Are Increasing – Why are Commodities Going Up continued:
The actions have had the effect of driving large amounts of investor funds – e.g., speculative funds and hedge funds – into the commodities markets. Meanwhile the steep climb in commodity prices has induced countries to impose austerity measures as they cope with recession.
Europe and Japan have also contributed to the rise in commodity prices with their cheap credit monetary policies sustaining near-zero interest rates for short term loans with the goal of energizing corporations and banks, helping them boost profits, and thus boosting the stock market.
Rising Commodities – Why Commodity Prices Are Increasing in 2011 continued:
The United States Federal Reserve stated in November, 2010 that they would be purchasing $600 billion in United States Treasury securities.
Many economic analysts are opposed to this action, which amounts to printing U.S. dollars, saying that it will destabilize the U.S. dollar and increase inflation while driving money into emerging economies that have swiftly growing economies and higher interest rates.
Again this drives huge amount of investor money into commodities markets driving up commodity prices.
Why Commodity Prices Are Increasing in 2011 – The Rising Price of Commodities
Large amounts of money now held by U.S. corporations and banks, in effect cash reserves, are being withheld from investment in hiring and production and instead has flowed into commodity markets – e.g., wheat, cotton, oil, silver, gold, corn, rice, copper and soybeans – driving up the prices of the commodities.
Also complicating the situation are fluctuating currencies that can make a commodity go up in price in one place while going down in another. The lowering value of the U.S. dollar has the effect of increasing commodity prices for all Americans.
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