Sixth form Conference

27th June 2006

World Commodity Prices

and Markets
Dr Wyn Morgan

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!

Figure 1: Copper Prices $/tonne (July 05-June 06)

Source: BBC

Figure 2
China's primary imports from world and from Africa, by major commodity group,
average annual rate of growth, 19942003
per cent

60
50
40
30
20
10
0
Total primary
commodities

Food

Agricultural raw
materials
World

Source: COMTRADE.

Africa

Fuels

Ores and Metals

Outline
1. Commodities defined
2. The main features of commodity markets
3. Price behaviour
4. Policies for commodity markets
5. Conclusions/questions

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
(Barrons 27th June 1983)

Primary commodities are natural and have

not been processed into other products
What types of internationally traded primary
commodities are there?

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

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)

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)

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 - weather
http://business.timesonline.co.uk/article/0,,9065-2236557.html

Graph 1: Commodity Market with Supply Shock

S2

Price

S1

P2

S3

P1
P3
D
Q2 Q1 Q3

Quantity

Graph 2: Commodity Market with a Demand Shift

Price

S
P2
P1

D1
Q1 Q2

D2

Quantity

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

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

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)

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

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

Graph 3: Price Bands in a Commodity Market

Price

Pu
Pe
PL
D
Qe

Quantity

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

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

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

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?