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Why Are Commodity Prices Rising? Let Me Count the Ways

January 18, 2011 Comments off

Our overview of 2011 ‘What Ifs’ concentrated on the concepts of bifurcation and biflation. Those themes are already playing out just a couple of weeks into the New Year. Inflation in all types of commodities has ramped up even further, leaving countries like China, India, Brazil, Thailand and South Korea to deal with more than their fair share of these inflationary forces. Meanwhile, easy monetary policy in the U.S. and Europe just adds fuel to the inflation fire.

The United Nations food agency (FAO) kicked off 2011 by announcing that December of 2010 saw food prices eclipse the record levels hit during the 2008 food crisis, which triggered riots in Egypt, Cameroon, and Haiti at the time. The current spike in food prices has already caused violent food riots in Algeria, Tunisia, Morocco, Yemen, and Jordan.

Food Inflation by the Numbers

Food inflation has already hit double digits in China, India and Brazil. It’s not hard to see why when you look at how some of the major soft commodities have performed over the last 12 months:

  • Corn: + 69%
  • Wheat: + 47%
  • Soy Beans: + 44%
  • Sugar: + 15%
  • Coffee: + 65%
  • Cotton: + 105%

(Trailing 12-month price moves as of January 12, 2011)

While these price spikes are causing food and clothing prices to rise, those effects will undoubtedly be exacerbated by the simultaneous rise in energy and raw materials we have seen:

  • Oil: + 15% over 12 months and + 30% since the August, 2010 low
  • Copper: + 30%

Overall, you can see the rise in commodity prices in the CRB Index, up about 30% since August of 2010, but well off the parabolic peak of 2008: Read more…