Blame traders, not eaters, for commodity price spike

Monday, October 4, 2010

Statistics on food consumption show that the Chinese and Indians aren't becoming big meat eaters. So that "trend," popularly raised as a reason for the boom in commodities, didn't drive up corn, wheat and soybean prices two years ago, says a study by World Bank Development Prospects.

"A closer look at the growth trends of population and income over the past decades, coupled with those of demand for food commodities, shows no evidence that food demand growth accelerated either in China and India or in the world as a whole," says the study.

Don't blame biofuels production either; it accounts for only 1.5 per cent of the acres worldwide used for growing grains and oilseeds. Instead, says the World Bank, "we conjecture that index fund activity played a key role during the 2008 price spike."

"A major commercial bank" estimated that an additional US$60 billion went into commodities during 2009, bringing the total investment to $230-$240 billion.

"Fiscal expansion in many countries and lax monetary policy created an environment that favoured high commodity prices," says the report, linking food to energy prices. 

Policy changes in one market may affect other markets. Expectations about the use of corn for biofuels can result in high wheat prices even in the presence of record wheat stocks. BF