In the last five years, the price of commodities like rubber, corn, and cotton have doubled, crashed, and then quadrupled. Is this a typical tango between limited supply and growing demand? Or have central banks and investors pumped the commodities markets with extra juice that makes their gyrations more violent?
In July, the St. Louis Fed looked at this very question. This synchronization of price waves across many commodities
(see above) might suggest that our commodity price boom is "a
bubble driven primarily by near-zero interest rates and excessive
speculation in commodity futures markets." But it's more likely that market fundamentals are driving the high price of agricultural products and other resources, for at least three reasons:
1) Supply shocks: The 47 percent increase in wheat prices last year was largely attributable to "drought in Russia and China and to floods in Canada and Australia," the Fed reported. High cotton prices stemmed from floods in China, the world's largest producer, and Pakistan, its fourth-largest.
2) The Rise of China/India, whose share of the aluminum and copper market has quadrupled since 1995.
3) The Rise of Biofuels: The growth of ethanol and biodiesel demand means energy demands are eating what would have formerly been surplus of corn and soy. This has the effect of "placing a floor" beneath food prices, since there will always be a base of demand for these crops.