Commodity Booms and Busts

Abstract

Periodically, the global economy experiences great commodity booms and busts, characterized by a broad and sharp comovement of commodity prices. There have been two such episodes since the Korean War. The first event peaked in 1974 and the second in 2008, 34 years apart. Both created major economic and political shocks, including fallen governments and human suffering due to high food prices. Each occurrence raised serious concerns over food and energy security and led to more government intervention in the commodity markets. Although there is no simple explanation for what causes such complex events, they do share similar characteristics. We find at the core of these cycles a set of contemporaneous supply and demand surprises that coincided with low inventories and that were magnified by macroeconomic shocks and policy responses. In the next few decades, the world faces the prospect of continued increases in the demand for commodities and greater uncertainty about supply. However, because market participants are likely to respond by increasing inventory holdings and investing in new technologies, we see no reason to expect an increase in the frequency of dramatic commodity booms and busts.

Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us

“…This explanation may conjure up images of burning oil fields, but actually there was no fighting in any of the Arab oil-5 In related work, Carter, Rausser and Smith (2011) conclude that similar results hold for commodity prices more generally, noting that commodity price booms over the last four decades have been preceded by unusually high economic growth.…”

Commodity Storage and the Market Effects of Biofuel Policies

“…This growth spurs demand for commodities and raises commodity prices. In a review article (Carter, Rausser and Smith, 2011), we show that both the 1973-74 and 2007-08 commodity booms were preceded by unusually high world economic growth, especially in middle-income countries. Baumeister and Kilian (2014) show that corn prices are correlated with the price of oil, but that correlation is largely "driven by common macroeconomic determinants of the prices of oil and of agricultural commodities.…”

Food price policy in an era of market instability: a political economy analysis

“…In this respect, US biofuel policies constitute new episodes in the saga of distortionary agricultural policies that not only cause world price instability but also harm the welfare of consumers in food-importing developing countries. 26 Developing country policy responses to higher commodity prices in 2008 (caused by US and EU biofuel policies) in the form of export taxes, for example, further exacerbated commodity price volatility (Carter, Rausser, and Smith 2011). Thus, while US agricultural and macroeconomic policies have strongly affected food grain commodity prices and volatility, so have US environmental and energy policies. The roller-coaster ride in market volatility since the financial crisis of 2008, and the re-emergence of peaks in corn, wheat, and soybean prices in 2011, can be traced to all three forms of intervention: US renewable-energy, environmental, and agricultural policies.…”

“…When such events combine with macroeconomic fiscal and monetary policies that result in disequilibria between nominal and real rates of interest, the incentives for stockholding change. Moreover, export quotas and other trade restrictions can aggravate (and have aggravated) the volatility of food commodity prices and send the wrong price signals to domestic markets (Carter, Rausser, and Smith 2011). To the extent that such price volatility is not temporary, the cross-commodity linkages through competition for land allocation and demand substitutability often create spill-over effects from one food commodity to another.…”