What causes volatility in commodity prices? – Twin towns
The prices of commodities, including agricultural crops, minerals and metals or fuels such as crude oil and its derivatives, have increased rapidly in recent months. What is causing this? How will this affect our overall economy or our own households? Readers asked these questions in response to the May 16 column on inflation.
Soaring input prices end up affecting everyone. They also involve interesting basic economic information, so an explanation may be helpful.
One only needs to read the headlines to know how widespread the price hikes are. Corn prices for southern Minnesota are about $ 6.70 a bushel, down from about $ 3.30 a year ago. Soybeans cost around $ 15 compared to $ 8.40 this month last year.
Internationally traded iron ore doubled from $ 84 per metric tonne to $ 178. This metric is a weighted average of various types of minerals. Taconite pellets produced in Minnesota are worth more than this average, but their prices have increased by the same proportion. Finished aluminum is up 60%, copper 85% and hot rolled steel 42%. The thinner, thinner cold rolled steel used in appliances and
automobiles have grown 30 percent in the past year.
West Texas crude oil costs $ 66 this week. The last week of May 2020, it was $ 34. Thus, the national average price of gasoline is up 34% and diesel fuel even more 12 months ago.
Wow! The prices are only going up! General price inflation, already on the rise, is about to explode! Are we ready for an economy like the 1970s, or worse?
Not at all. Yes, the prices of all kinds of inputs are up sharply compared to 12 months ago. But it was a low point for our nation and the world slipping into a recession caused by COVID. If you look at long term price patterns, you get a better picture.
Consider the last 15 years – from 2006 – the last before the bursting of global bubbles in US commodities and financial derivatives. As a benchmark, the general consumer price index increased 38% over this period.
Start with gasoline, which is a big part of most household budgets. Since May 2006, the highest weekly average was $ 4.76, the lowest $ 1.98 and the average $ 3.13. Nationally, we are now a dime above that. Minnesota, as usual, is below the national average.
Corn is essential to the economy of many Minnesota households, whether in production, transportation or processing. In world trade, the price of corn in March was $ 4.97 per bushel and rising. The high over the 15-year period was $ 8.46, the low $ 3.28 and the average $ 4.96. For the global soybean trade, they were $ 10.72, $ 5.63 and $ 16.76 compared to $ 13.90 in March 2021.
In iron ore, which is also important to Minnesota, we are in the high end. The low of $ 33 per metric tonne was in 2006. The high of $ 187 was in 2011, when taconite pellets from Minnesota were shipped by rail to Prince Rupert, B.C., an expensive proposition, for be shipped to China. The 15-year average was $ 92.
You could go through a whole list of primary raw materials or intermediate products like sheet steel or aluminum ingots. Prices are indeed up from the deep rut of a year ago and well above the lows of the past 15 years. But most are just slightly above these longer-term averages and well below the highs reached by episodic price spikes. So yes, the prices are going up, but no, they are not “out of control”.
The quoted price ranges raise a second question: why are the prices of these yo-yo products so prevalent? We don’t see similar fluctuations in the prices of new cars, movie tickets, televisions, books, or rebuilt alternators. What happens with inputs that are different from the “final goods” that households buy?
First of all, agricultural products are subject to climatic hazards. Part of the recent increases for corn is due to drought in key areas of Argentina, just as many areas of corn growing in the United States remain drier than usual.
In addition, crops are seasonal. A garment factory can add workers or shifts if demand increases and reduce them when demand decreases. But corn and soybeans in major producing countries are planted once a year. After the end of May, corn and soybean prices could skyrocket or fall underground, but there is nothing farmers can do to change the 2021 crop.
In addition, the total land area is fixed. Over longer periods, some may be introduced into agricultural production or converted back to meadows or forests. Many acres in the Deep South that have grown cotton for a century are now growing pine trees. Cultivated land can be irrigated or drained. But all of this takes time.
For livestock products, whose production relies on breeding animals, the ramp-up takes even longer. Thus, beef and pork have well-established price cycles, determined by the parameters of cattle and hogs.
The mines have equally long delays in expansion. Yes, some closed copper mines in Montana or Chile can be reopened in a matter of months if prices soar. But the physical opening of a new open-pit copper or iron mine takes years, even in poor countries where environmental regulations are minimal and longer in high-income countries.
Once you’ve spent a billion dollars to open a new copper mine, you have a lot of debt to pay off for labor, diesel fuel, and explosives, so even if the prices go down, you continue to operate. Ditto for a steel mill, producing oil wells or finishing hog barns in Minnesota. As long as you get everything you need to cover operating costs, it’s better to keep running rather than shutting down and having no income to pay for the fixed costs.
There are also household purchasing behavior factors on the consumption side that contribute to strong cyclical price fluctuations for some goods, but not for others. However, the exploration of the latter must await a future column.