Any surge in particular commodity prices is naturally good news for the producers, but past experience of the longer-term impact of previous surges inevitably leads to the concern that good news for the few might be bad news for the many: the oil-price shocks of the 1970s triggered a bout of global inflation, followed by global recession.
To this should be added a further and even deeper concern. The world's population is rising at 90 million a year, and large parts of the world, particularly in China, are industrialising very fast. The combination of rising population and rapid economic growth inevitably puts a general pressure on the planet's resources, and a particular pressure on food and energy.
These concerns could be summed up in two questions. Are we likely to see renewed world inflation? And are we seeing some early signs of pressure from population and energy use?
It is, I think, fairly easy to be comfortable about the first. The surges since the beginning of the year in both the wheat and the oil price are quite startling, as the graph on the left shows. There has been a corresponding decline in stocks of both commodities: wheat is apparently at the lowest level since 1948 and oil is at 19-year low.
Nevertheless, as far the impact on inflation is concerned, there are two reassuring features. The first is that you can explain the pressure on both by pointing to one-off features. Thus the wheat price has been inflated by poor harvests in Australia and the US, while the oil price (which is already falling back a bit) has been hit by an unusually hard winter in both Western Europe and North America. The second is that there has been no significant increase in other commodity prices. True, there was a surge in metal prices last year, but this has largely unwound. Gold, traditionally an early-warning indicator of inflation, is flat. Even food prices, as measured by the Economist commodity index, are a shade lower than they were in April last year.
The experience of the past 40 years has trained us to be extremely sensitive to any potential early-warning signal of rising inflation. But as a new paper by UBS points out, some research at the New York Federal Reserve Bank last year suggests that commodity prices are now much less likely to trigger inflation than they used to, partly because commodities are less important in the western developed economies, partly because they have lost their reputation as an inflation hedge and partly because any rise can be offset by monetary policy. (They might have added that any rise would be choked off by the bond markets too, but it is asking a lot of central bankers to acknowledge that one of the world's main bulwarks against inflation is the bond market, not themselves!)
So, fingers crossed, a jump like this in a couple of commodity prices is not an inflationary danger signal.
The other concern, about the longer-term pressure on world resources, is on the other hand a very real one. You can make the case sketched above that this particular run in wheat and oil is a one-off, and I think it is. But it is perfectly possible to believe that, yet still worry: worry there will be more and more similar spikes in commodity prices in the next couple of decades, and that these spikes will become sharper and more damaging.
Anyone faced with this concern has to acknowledge that so far there has been no general commodity crisis. The graph on the right shows what has happened to real commodity prices over the past century. It is a period of extraordinary growth in world output and population, in depression and inflation, and of course interspersed by two world wars. Yet the long- term trend of real commodity prices has been down. In real terms they are half what they were 100 years ago.
It is a pretty bumpy trend, to be sure: if you put your hands over the left and right sides of the graph, to start in 1930 and end in 1975, you might think that it was up. The graph excludes oil and it has no necessary predictive power. But you have to admit that, so far, there is no indication in the commodity markets of overall pressure on the world's resources.
There are, however, two problems with that. The first is that commodity prices do not reflect damage to the environment. Indeed one of the reasons why commodity prices have come down is that we have not worried sufficiently about such damage. We have been able to produce more food partly by extending the area under cultivation, which has drastically reduced the habitat for many wild creatures. And we have increased output partly by intensive farming, the environmental consequences of which are still not fully known.
Nor, for that matter, do we know the climatic consequences of deforestation and the burning of fossil fuels. The computer models of global weather suggest that some warming will take place as a result of the greenhouse effect, but the margins of error are enormous.
The second problem is that even if the world is able to produce enough food to feed the growing population, the overwhelming likelihood is that the additional food will be in the wrong place. It will be produced on the prairies of North America, not in the smallholdings of Africa where it is needed. It seems inevitable too that China will become a large food importer, and will need to export more and more industrial goods to cover the cost of these imports. Those industrial goods will need power to produce them, adding to China's energy demand, which in any case is rising sharply.
This means that we should expect more big shocks to the world commodity markets. There will be sudden swings in the grain price when a country the size of China finds it needs to import, and the countries least able to afford it will be hit hardest. Sadly, that will happen this year, following this surge in wheat prices.
At some stage, maybe not for another 15 or 20 years, the oil market will probably tighten too. There are plenty of most commodities in the world, but the two present candidates, grain and oil, appear particularly vulnerable.
I'm not so worried about energy prices, because we know from the experience of the 1970s that a sharp rise in the oil price will stimulate more discoveries and research into fuel conservation. But we may quite suddenly find large parts of the world facing food shortages, with catastrophic consequences. That is not the worry now: the rise in the grain price is a supply problem, not a demand one. But it does give a hint, in a very mild form, of problems ahead. It is a warning, and not before time.Reuse content