The extreme volatility of commodities prices and the unpredictability that comes with it is increasing the cost of doing business for everyone.
The price swings have been eye-popping. In March, cocoa futures plummeted 12 per cent in less than a minute and then quickly recovered in a “flash crash” that left traders mystified. Cotton futures have fluctuated so wildly that they flipped market circuit-breakers on about two-thirds of the trading days this year. Last November, sugar futures fell more than 20 per cent over two days, their biggest two-day sell-off in at least 17 years, and they often swing more in one day than they used to move in a month.
Arcane to the layman, commodities futures are essential to many businesses, like food manufacturers and fuel suppliers, which use them to help set prices and predict costs for items as varied as corn flakes, blue jeans and mocha lattes. Farmers use them to decide which crops to plant. And they keep the wheels of industry turning smoothly by acting like insurance policies to hedge the risks inherent in buying and selling raw ingredients.
But when prices move erratically, it increases the cost of buying the futures and options that protect companies against such changes. Those added costs find their way to the grocery store and the shopping mall.
Consider home heating oil, for example. Sean Cota, a propane gas and heating oil supplier in Bellows Falls (Vermont), signs contracts with customers to supply oil to them during the winter heating season.
Since Cota typically buys oil only as he needs to supply it, he uses heating oil futures and options as a form of insurance to protect himself against unexpected jumps in prices. Seven or eight years ago, he said, such protection added 2 to 6 cents to each gallon of heating oil he bought. These days, volatile oil prices mean it costs him 37 cents a gallon for such hedging — an extra cost that he expects to add to customers’ heating oil bills, which are already higher because the price of oil has risen sharply in the last year.
“It is affecting my company drastically,” said Cota, who has been lobbying in Washington for restrictions on financial flows into the commodities markets. “I pass the extra cost on to customers, but sometimes I just have to swallow it.”
Volatility can drive prices down as quickly as it pushes them up. On Thursday, prices for a wide range of commodities plunged, with the broad CRB commodities index closing down 4.9 per cent.
Making the situation more confounding for businesses is that commodities have become more volatile for reasons that no one fully understands.
Much of the fluctuation is caused by economic supply and demand. Stockpiles of goods like cotton, corn and coffee are at historically low levels, setting markets on a hair trigger. Demand for many commodities is rising as developing countries like China and India become wealthier and buy ever more food and oil.
©2011 The New York
Times News Service
