Thread: World commodity markets hit the roof

World commodity markets hit the roof
TORONTO, Jan. 3
HARI SUD

Column: Abroad View
Commodity trading is not practiced in the stock markets; rather it is undertaken in commodity exchanges. Stocks of the companies that manufacture these products are traded on the stock exchanges. The products themselves -- agricultural products, metals and minerals, coal, oil, gold, silver, etc. -- are traded actively at the commodity exchanges.

London, New York, Chicago and the European Exchange in Paris and other European cities can boast of major commodity exchanges. India and China have much smaller commodity exchanges at various locations.

Stocks are traded based on company performance; commodity trades are determined by the overall, worldwide, demand and supply. This sets the two apart.

Whereas the stock exchange is like a deluxe train moving at a regular pace, the commodity exchange is a freight train rushing through at breakneck speed. Hence commodity exchanges are not for the fainthearted.

In addition, commodities are traded in future contracts, which is a product delivery agreement for a future specified date, or forward trading. It is mostly used for hedging price fluctuation risks. Liquidating the contract before its maturity by buying low and selling high makes money. Money is also lost in big amounts when the reverse happens.

The economies of Canada, Australia, Russia and much of the Middle East are based on resources. Canada accounts for 4 percent of its GDP from mining and minerals, a similar amount from agricultural and forest products and 2.5 percent from oil and natural gas. These sectors combined account for 35 percent of Canadian exports.

Russia is heavily dependent on resources -- oil and gas account for 20 percent of its GDP, minerals and mining account for 18 percent, and agriculture contributes 8 to 10 percent. On the other hand, the United States is a service-based economy, in which agriculture, minerals and mining and oil and gas account for 1 percent, 4 percent and 2 percent of the GDP respectively. The service sector and industry account for 70 percent and 23 percent of the GDP.

When commodities underwent a meteoric rise in prices based on demand in the last three years, the resource-based economies of Canada, Russia, Australia and the Middle East experienced a huge cash influx. A case in point is gold prices, which have doubled in four years, as did other metals like copper, zinc, nickel, palladium and aluminum. This has doubled the income to top producers like Australia, South Africa, Canada and Russia.

Not to be outdone, wheat, coffee, hogs, rice, fruit juice, cotton and corn prices have risen considerably. Grains like wheat, rice and corn -- especially the wheat -- have scaled new heights. Whereas in the 1990s wheat was selling at about US$2.35 a bushel, its price now is about US$4.60 a bushel.

All of this is happening because of the rising populations in China and India and worldwide vagaries of the weather. Moreover China and India now have cash to pay for their grain purchases.

Oil and gas are a separate story. Although demand is high, the Organization of Petroleum Exporting Countries -- the oil and gas production cartel -- strictly controls the production, hence can force prices up with the stroke of a pen. Canada and Russia do not belong to any cartel, but they enjoy the benefits of the upward movement of prices. Today, Canada sells most of its surplus oil and gas to the United States. Russia sells its gas to Europe and exports oil to anybody who pays.

In the next three to four decades, over production is likely to reduce oil output in Saudi Arabia. Russia will make up the shortage for a short period of time, until it also runs dry. By then alternative oil sources will be discovered.

Whereas the U.S. economy is showing signs of strain under the weight of the Iraq war and the bad management practices of sub-prime loans, the Canadian, Australian and Russian economies are enjoying the bounty of higher commodity prices. They do not have a sub-prime loan problem. Also extra cash is keeping their economies and national finances in good order.

The oil and gas exporters in the Middle East are the biggest winners. They have a huge cash influx into their economies. They do not have their own capacity to absorb this cash inflow, hence end up depositing the extra cash back into the U.S. banking system, making the United States the ultimate winner.

China and India are major importers of oil and gas, copper, aluminum, zinc, tin, nickel, gold and silver and uranium, and are shelling out a lot more money today than they were a few years back. High demand is to be blamed. Copper producers in Canada are joking that there is no end in sight for demand by China and India. Both countries are rebuilding their infrastructure every year at a rate equal to the total infrastructure of Canada, hence would use copper in greater amounts in the near future. That will keep Canada and other copper producers very happy.

Back to agriculture -- India set a new record for wheat production in 2006-07 at 76 million tons. But India is still importing wheat. The reason is that India is rebuilding its buffer stock, which had been depleted over two previous bad seasons. Domestic production is not enough to rebuild the stock in one year, so imports are necessary.

China is in a similar situation, although its statistics of production and consumption are not reliable. This is driving wheat prices up and allowing exporting nations to reap big rewards.

The Chinese have made phenomenal progress in steelmaking in the last 25 years. But when it comes to non-ferrous metals, their output is below average. Developing and bringing mines on stream is a tedious five-year task. That also is possible, with adequate finance, expertise and speedy government approvals. But there is no immediate possibility that local demand will be met with internal production. Also in some cases like uranium, palladium, molybdenum and beryllium there are no large-scale ore bodies locally to replace the imports. These imports have tripled in the last 15 years -- and so have the prices.

In the long run, strategic factors may force India and China to take a more serious look at increased mineral production, but the immediate future is less rosy. The same is true of agriculture. As China has polluted its environment and land, and India has not aggressively dealt with land reform and subsidies, foodstuff imports by both will continue. This will continue to drive up food prices all over the world.

What the world should worry about today is the future food supply. Rising populations will demand food, which can only be grown in fields irrigated with clean water and supplied with other input. If water is polluted and land is in short supply, the population will starve. Food and water wars will begin. This scenario, no matter how unpleasant, looks possible in 50 years when the world's population reaches 10 billion.

In short, rapid industrialization of the less developed world has forced up demand for all commodities. This is translating into high prices and prosperity in the resource-producing countries. But there are limits to this prosperity. As the resources run out one by one, these countries will find themselves at the short end of the stick. The immediate tasks, therefore, should be conservation, environmental care and population control.

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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)

http://www.upiasiaonline.com/Economics/ ... roof/4717/

Like we protect our "middle eastern oil interests" by stationing us troops in middle eastern countries, we should protect "US commodity interests" by putting troops next to countries that export wheat and stuff.

we have been able to suck most of world's oil our way at cheaper prices than others, there is no reason we cant do the same for commodities.

we are the number one in the world and so we get to pick what we want and how much first.

I'll confess I don't understand the 'market', but rather than using troops all over the world, I wish we would try to do things better in America.

I have a nephew who is a petroleum geologist. He just brought in some wells in Africa - they think one will be a world's record producer. When I talked with him, I told him I wanted him to find a special kind of oil - cheap oil.

He said if I wanted cheap oil, I needed to talk with my Wall Street son in law -

Why in a nation that has led the world for quite some time in innovations, food production, etc., are we suddenly totally helpless and at the mercy of every country in the world?