Placing the 2006/08 Commodity Price Boom into Perspective

42 Pages Posted: 20 Apr 2016

See all articles by John Baffes

John Baffes

World Bank

Tassos Haniotis

European Union - European Commission

Date Written: July 1, 2010

Abstract

The 2006-08 commodity price boom was one of the longest and broadest of the post-World War II period. Apart from strong and sustained economic growth, the recent boom was fueled by numerous factors, including low past investment in extractive commodities, weak dollar, fiscal expansion, and lax monetary policy in many countries, and investment fund activity. At the same time, the combination of adverse weather conditions, the diversion of some food commodities to the production of biofuels, and government policies (including export bans and prohibitive taxes) brought global stocks of many food commodities down to levels not seen since the early 1970s. This in turn accelerated the price increases that eventually led to the 2008 rally. The weakening and/or reversal of these factors coupled with the financial crisis that erupted in September 2008 and the subsequent global economic downturn, induced sharp price declines across most commodity sectors. Yet, the main price indices are still twice as high compared to their 2000 real levels, begging once more the question about the real factors affecting them. This paper concludes that a stronger link between energy and non-energy commodity prices is likely to be the dominant influence on developments in commodity, and especially food, markets. Demand by emerging economies is unlikely to put additional pressure on the prices of food commodities. The paper also argues that the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by financial investors (the so-called "financialization of commodities" ) may have been partly responsible for the 2007/08 spike. Finally, econometric analysis of the long-term evolution of commodity prices supports the thesis that price variability overwhelms price trends.

Keywords: Markets and Market Access, Emerging Markets, Commodities, Energy Production and Transportation, E-Business

Suggested Citation

Baffes, John and Haniotis, Tassos, Placing the 2006/08 Commodity Price Boom into Perspective (July 1, 2010). World Bank Policy Research Working Paper No. 5371. Available at SSRN: https://ssrn.com/abstract=1646794

John Baffes (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/jbaffes

Tassos Haniotis

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

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