SR BLOG

Commodities, some thoughts

I've always been interested in commodities - probably because I was born in a little town close to the countryside, maybe because my grandparents worked in the agricultural sector, being stock-breeders and farmers.

In 2008 I wrote an article for this blog highlighting what I started to see into commodity prices. The price variation observed on commodities markets since 2007, most of all on oil and agricultural markets, have made commodity price volatility a vital issue for the world economy. I want to get back to the matter updating the data and seeing what is going on now.

Commodity' price topics have been discussed also in 2009 G20 as far as they involve the sustainable growth, development, peace and wealth distribution fairness.

Commodity prices fluctuated considerably in 2007-2008 both in terms of amplitude and speed. The surge has been recorded until the beginning of the 2008 crisis when they started to fall sharply, revamping at the beginning of 2009 reaching the 2008 peaks, according to the current data.

Excessive price fluctuations foster uncertainty and disrupt the forecasting abilities of the various economic stakeholders. This uncertainty is exacerbated by the lack of transparency in commodities markets, which in turn makes prices more volatile.

The fluctuations particularly affect consumers' purchasing power as well as the earnings of commodity producers. Financial markets should provide the ways for managing this volatility, by allowing actors to protect themselves against price variations.

I would focus my attention on the analysis of the latter in particular, which in my opinion plays a crucial role in such a fragile context as the commodity markets.

Just as any other industry, finance needs innovation too, in order to hedge risks, to find new bets to play on and to find arbitrage possibilities. Innovation in finance is achieved through new engineering to allow new products to be born (read, derivatives, or also PRIPs) that allow keeping risks or hedging positions against them.

The point is that finance influences the real value of the stocks, and commodity prices in particular. Commodity prices deviate from values consistent with their "fundamentals" because of the role played by investors in the market, providing it with more or less liquidity.

High frequency trading can deeply affect the market, so as some ETF can, having commodities as underlying.

Keeping in consideration the sensitivity of the matter, according to me transparency of the commodity markets and their prices would act as a mitigant. It should be kept into account that people need commodities to live - think rice and belt in particular.

A stronger regulation on trading should be imposed. It must be considered that financial markets are also self-fuelling so a haemorrhage getting out of a market can expand also affecting the commodity market. On top of that, finance should also help the local population develop their markets, going back to be closer to the 'real' world than the 'paper' one.