Monday, January 24, 2011

Commodity Prices Spiking -- Is Speculation to Blame?

Consider these two stories:

First we have this:

French President Nicolas Sarkozy said regulation of commodity markets will be a priority as he leads the Group of 20 nations this year, and inaction may cause food rioting in the world’s poorest countries.

Some commodity markets lack safeguards to limit price spikes and “price manipulation,” Sarkozy said at a press briefing in Paris today. France’s head of state said he asked Russian President Dmitry Medvedev to help study the role of derivatives in commodity-price swings.

“If we do nothing, we risk having food riots in the poorest countries and also an unfavorable impact on global growth,” Sarkozy said. “We want regulation of the financial markets for commodities.”

Some type of regulation for price swings would not be unheard of. In fact, we already see it in various commodity markets. However, it's also important to realize that regulation is not the sole issue:

Wheat futures climbed to the highest since August as importers stepped up purchases while adverse weather cut global output. Rice headed for the longest rally since late October.

The U.S. Department of Agriculture said on Jan. 21 that exporters sold 1.054 million metric tons of wheat in the week ended Jan. 13, seven times more than a week earlier and the most since August. Tunisia bought 100,000 tons of durum, Reuters said, citing European traders. Qatar, Bangladesh, Morocco and Iraq have issued tenders to buy rice or wheat since Jan. 19.

“Some governments are concerned about food riots, so they’re walking into the rice and wheat markets and just buying it,” said Darrell Holaday, the president of Advanced Market Concepts in Manhattan, Kansas. “We’ve had enough production problems in different spots around the world that it’s caused some problems.”

Wheat crops were hammered by the poor conditions last year in Russia. Global warming will change crop growth patterns. And with China, India and other emerging countries coming on line and growing, demand increases are to be expected. So there are legitimate demand based issues involved as well.