world commodity prices and markets dr wyn morgan sixth form conference 27th june 2006
TRANSCRIPT
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World Commodity Prices and Markets
Dr Wyn Morgan
Sixth form Conference
27th June 2006
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Question: what links Chinese economic policy with a crime committed in Sinfin in June?http://news.bbc.co.uk/1/hi/england/derbyshire/5011174.stm
Answer: the price of copper. Why?
China is growing rapidly and demanding commodities such as copper, thus prices have risen sharply
Criminals see prices rising and try to “supply” some from a community centre!
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Figure 1: Copper Prices $/tonne (July ’05-June ’06)
Source: BBC
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Source: COMTRADE.
Figure 2
China's primary imports from world and from Africa, by major commodity group,average annual rate of growth, 1994–2003
per cent
0
10
20
30
40
50
60
Total primarycommodities
Food Agricultural rawmaterials
Fuels Ores and Metals
World Africa
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Outline
1. Commodities defined
2. The main features of commodity markets
3. Price behaviour
4. Policies for commodity markets
5. Conclusions/questions
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1. Commodities Defined
“A commodity is something that hurts when you drop it on your big toe, or smells bad if you leave it out in the sun too long”
(Barron’s 27th June 1983)
Primary commodities are “natural” and have not been processed into other products
What types of internationally traded primary commodities are there?
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Food/Beverages
Coffee, cocoa, sugar, wheat, maize, rice, bananas, beef
Minerals and Metals
Tin, copper, zinc, nickel, iron ore, aluminium
Agricultural Raw Materials
Rubber, cotton, tobacco, oilseeds, soybeans, oils (palm, groundnut)
Fuels
Oil, gas and coal
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2. What are the Main Features of Commodity Markets?
Major share of world trade
•23% including fuels
•14% excluding fuels
•Many countries export & import (see Table 1)
•Most DMEs net importers (except Australia and Canada)
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Demand – generally stable
•Necessities (e.g. food)
Low degree of substitution
Low income elasticity for food
•Inputs into manufacturing production:
Copper in construction or palladium for mobile phones
Some substitution (e.g. rubber)
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Supply – can be volatile
•Not just developing countries (see Table 2)
•Time period for supply means short run is a long time and elasticity low e.g.:
Minerals need new mines
Coffee bushes need 7 years to mature
•Effect of shocks
Permanent - new processes
Temporary - weatherhttp://business.timesonline.co.uk/article/0,,9065-2236557.html
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Graph 1: Commodity Market with Supply Shock
Price
Quantity
S1
D
S2
P2
P1
Q1Q2
S3
P3
Q3
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Graph 2: Commodity Market with a Demand Shift
Price
Quantity
S
P1
Q1
D1
D2
P2
Q2
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3. Price Behaviour
Commodity prices exhibit two main features:
1. A high degree of volatility (see Table 3) arising mostly from supply volatility
2. Downward trend relative to manufactured goods
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Figure 3: Nominal Quarterly Commodity Prices (1957Q1 = 100)
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
1957
Q1
1958
Q3
1960
Q1
1961
Q3
1963
Q1
1964
Q3
1966
Q1
1967
Q3
1969
Q1
1970
Q3
1972
Q1
1973
Q3
1975
Q1
1976
Q3
1978
Q1
1979
Q3
1981
Q1
1982
Q3
1984
Q1
1985
Q3
1987
Q1
1988
Q3
1990
Q1
1991
Q3
1993
Q1
1994
Q3
1996
Q1
1997
Q3
1999
Q1
2000
Q3
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Figure 4: Real Commodity Prices (Deflated by US Price Index)
100
150
200
250
300
350
400
450
1957
Q1
1958
Q2
1959
Q3
1960
Q4
1962
Q1
1963
Q2
1964
Q3
1965
Q4
1967
Q1
1968
Q2
1969
Q3
1970
Q4
1972
Q1
1973
Q2
1974
Q3
1975
Q4
1977
Q1
1978
Q2
1979
Q3
1980
Q4
1982
Q1
1983
Q2
1984
Q3
1985
Q4
1987
Q1
1988
Q2
1989
Q3
1990
Q4
1992
Q1
1993
Q2
1994
Q3
1995
Q4
1997
Q1
1998
Q2
1999
Q3
2000
Q4
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Figure 5: Nominal Quarterly Commodity Prices (1957Q1 = 100)
160.0
180.0
200.0
220.0
240.0
260.0
280.0
300.019
80Q
1
1980
Q4
1981
Q3
1982
Q2
1983
Q1
1983
Q4
1984
Q3
1985
Q2
1986
Q1
1986
Q4
1987
Q3
1988
Q2
1989
Q1
1989
Q4
1990
Q3
1991
Q2
1992
Q1
1992
Q4
1993
Q3
1994
Q2
1995
Q1
1995
Q4
1996
Q3
1997
Q2
1998
Q1
1998
Q4
1999
Q3
2000
Q2
2001
Q1
2001
Q4
Commodity Price Index
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Figure 6: Real Commodity Prices 1980-2000 (Deflated by US Price Index)
140
160
180
200
220
240
260
280
300
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Do these features represent a problem?
Volatility
•Input price volatility
Labour and capital costs known, other inputs not – what happens?
Who pays for this? Inflation effects?
•Selling price volatility
Producer income unknown
Investment difficulties
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Downward Trend
•LDC producers rely on export revenues
•Need manufactured goods for growth
•Try to produce more to increase revenues: Y = PQ
Increase Q to offset fall in P but this causes P to fall!
•Problem of dependence on a few commodities for export earnings (see Table 4)
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4. Policies for Commodity Markets
What do countries want?
•DMEs want good supplies but with stable and “fair” (low??) prices
•LDCs want increased export earnings but want them to be stable (high prices??)
How can these be reconciled?By “managing” the market
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International Commodity Agreements
•Buyers and sellers control supply to keep prices in a stable range
•Supply controlled by production limits, export quotas, buffer stocks etc
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Graph 3: Price Bands in a Commodity Market
Price
Quantity
S
D
Pu
Pe
Qe
PL
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International Commodity Agreements•Buyers and sellers control supply to keep prices in a stable range
•Supply controlled by production limits, export quotas, buffer stocks etc
•Existed for a number of commodities: sugar, coffee, cocoa, rubber, tin
•All collapsed due to disagreements between the two sides
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One-sided interventions
•Supply control by producers (cartels)
e.g. OPEC
Controls supply by quotas and can increase prices (see 1973/4 on Figure 1)
•Protection of domestic producers
e.g. Common Agricultural Policy
Use tariffs and artificial prices to raise incomes for EU farmers
Impact on world markets significant
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Other Policy Issues in Commodity Markets
•Development and growth concerns
•Diversification of production in LDCs
•Inflation in DMEs
•Environmental concerns
•Technological change and its effects
•Market power and prices
•Risk management
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5. Conclusions/Questions
• Commodities are important for both LDCs and DMEs
• Commodity markets have stable demand but potentially volatile supply
• Prices can be volatile in short run and downward trending in the long run
• Intervention can affect prices but what are the welfare implications of such policies?