Roller Coaster

• Author: Thomas Helbling; Nese Erbil; Marina Rousset
• Position: IMF’s Research Department
• Pages: 56

Page 56

The latest sharp rise and fall in commodity prices is not the first nor the last

COMMODITY prices collapsed in the second half of 2008 after a spectacular runup from early 2002 until the middle of last year.

Although commodity markets are often treated as if they were integrated, individual commodities vary widely in their demand and supply characteristics. A key question therefore is whether or not commodity price index changes are dominated by fluctuations in the prices of a few commodities.

Indeed, the most recent price boom was first and foremost an energy and metals price boom. Prices of these commodities tripled between mid-2002 and mid-2008. For metals, whose demand rises and falls with the global industrial cycle, the roughly 200 percent increase in prices during the strong global expansion was broadly in line with previous experience.

Nevertheless, major price gains were also recorded for other commodities. Prices of major grains and edible oils in particular almost tripled, reflecting a number of factors, including a pickup in demand growth because of changing diets and the rapid growth in biofuels, low inventories, adverse weather conditions, and rising energy costs (see “Riding a Wave,” F&D, March 2008).

In the second half of 2008, prices of...