While futures markets are blamed, analysts note various chinks in reasoning.
The sudden and sharp spike in global commodity prices has again fuelled the debate on whether this was the handiwork of speculators waiting to invest in commodities as an assets class, armed with huge liquidity.
The UN and the G-20 group of countries are studying the impact of financial instruments on food price volatility. So are a host of countries, including France and the US. In a recent seminar in Delhi, the UN’s special representative on food security and nutrition, David Nabarro, underlined the impact of futures markets on food prices, saying the global body very strongly believes certain financial instruments do accentuate price volatility in food commodities.
From November 2010 to January 2011, shows World Bank data, the average percentage price jumps were 19.2 in US wheat, 11.5 in maize, 10.9 in soy oil, 15.3 in palm oil, 8.8 in cocoa, 13 in Arabica coffee and 0.6 per cent in tea. During the same period in Europe, bananas became costly by (percentage figures) an average of 15.6, rubber in Singapore by 28, average cotton prices in the US by 12.4 and sugar by 12.4. Base and precious metals also jumped to their pre-crisis levels. Aluminium prices in the spot markets increased by (percentages) an average of 4.5, copper by 12.8, iron ore contract prices, freight-on-board Brazil, by 6.5, lead by 9.5, nickel by 11.9, tin and zinc by 7.6 and 3.5, respectively.
| HOW THEY STACK UP | |||
| Items | Nov-10 | Jan-11 | Change in % |
| Wheat** | 274.1 | 326.6 | (+) 19.1 |
| Maize** | 238.2 | 264.9 | (+) 11.5 |
| Soyoil** | 1,247 | 1,384 | (+) 10.9 |
| Arabica Coffee* | 514.7 | 581.5 | (+) 12.97 |
| Sugar* | 58.09 | 65.28 | (+) 12.37 |
| Rubber* | 431.2 | 552 | (+) 28 |
| Rock Phosphate** | 140 | 155 | (+) 10.71 |
| Aluminium** | 2,333 | 2,440 | (+) 4.5 |
| Copper** | 8,470 | 9,556 | (+) 12.8 |
| Nickel** | 22,909 | 25,646 | (+) 11.94 |
| Tin* | 2,552 | 2,747 | (+) 7.64 |
| Zinc* | 229.2 | 237.2 | (+) 3.49 |
| *Cents per kilogram, ** Dollars per metric tonne *** Dollars per troy ounce , **** Dollars per dry metric tonne unit Source: WORLD BANK | |||
The geographical spread and range of the rise in commodity prices has been uniform. A fact, which most analysts and market watchers attribute to debunk the theory that speculative activity in commodity derivatives has been fuelling the price rise in spot markets.
On facts
“Big hedge funds can build positions in some commodity derivatives to jack up prices, but it is very unlikely that all commodities which are traded in the futures market will move upward at the same time,” said Naveen Mathur, associate director, commodities and currencies, at Angel Broking.
Also Read
He said inherent fundamental problems in agricultural commodities like drought in Russia, floods in Australia and Pakistan and dry weather in China are some factors which could aggravate the supply situation in grains and oilseeds, given that all these are big producing nations. This is exactly what the futures market are showing, and is being reflected in physical prices as well.
In base metals, robust economic growth in both emerging economies and some developed nations has raised hopes that metal demand will exceed supplies. The rise in global crude oil prices because of geo-political tension in Egypt, Libya and Tunisia also pushed up prices of palm oil, rubber and fertiliser.
Also, the excess liquidity pumped into global monetary systems due to the push in economic growth is finally making its way into its destination of origin. “If it would have been only for emerging economies, then recent monetary tightening in India and China should have pulled down global commodity prices, at least of base metals, but it is not the case, which very clearly means that liquidity is now flowing towards its origination and having its impact with a lag effect,” Mathur said. “It is the people who are over-leveraged who blame speculation in commodity futures for fuelling spot prices, but it can happen in any market at any point of time,” said Jayant Manglik, president of Religare Commodities.
Discounting the myth that the current rally in global and Indian commodity markets was because of over speculation in futures, Manglik said in reality it is much easier to manipulate a spot market, than futures.
“Suppose wheat is selling at Rs 15 per kg and somebody comes and pushes its price to Rs 25 per kg, nobody can do anything for that, but if the same is done in futures, all the prospective sellers will move towards that and prices will naturally fall when deliveries are taken or settlement made,” Manglik explains.