NS4960 Spring Quarter 2018 Commodity Prices

Commodity Prices I “Shocks and Ores” Economist March 14, 2014 Short term gyrations in commodity prices may do more damage than long-run trends Fear of long run rise in commodity prices – Thomas Malthus prediction of mass famines due to scarcity of land Other view, rising prices stimulate more production and increased supplies, so that long run prices are stable or falling

Commodity Prices II Long run rates have been most pronounced for commodities in the ground – minerals, natural gas In contrast prices for resources that can be grown have trended downward Inflation adjusted prices of rice, corn and wheat are lower now then they were in 1950 Global population is 2.8 times above its 1980 level World grain production is 3.6 times higher

Commodity Prices III

Commodity Prices IV Long run trends easy to miss because medium-term super-cycles can push prices off trend for a generation Typical super-cycle – at least 20% away from trend lasts no more than 40 years from begging to end Such episodes cluster in periods of rapid industrialization and urbanization Economies in industrial boom like 1890s America or China in the 2000s need basic commodities Supply slower to respond Prices surge until supply catches up

Commodity Prices V Concludes most damaging commodity price movements not long run trends but short-run booms and busts Come and go more rapidly than super-cycles but can generate much larger movements in price Often produce spikes of at least 50-100% away from trend Some blame rapidly rising oil prices in 2007-08 for the start of the global recession Threats of Malthusian collapse attract attention but short run gyrations end up the bigger headache.