As I explained here, because commodities and commodity futures are widely stockpiled and traded by speculators, users and producers alike, prices can wildly disconnect from supply and demand factors, misleading inflation expectations and intensifying social unrest.
Over the past year of record financial stimulants and job loss, food prices have risen for 11 consecutive months, according to the Food and Agriculture Organization of the United Nations. This is making it harder for families to afford basic staples. Corn prices are 67% higher than a year ago, while sugar is up nearly 60%, and prices for cooking oil have doubled. See Food prices soar, compounding woes of the world’s poor. This matters a lot in developing countries where food costs can account for more than 30% of household spending (compared with 10% in America, down from 17% in 1960).
Most commodity traders are headquartered outside of North America, where bets on staples like oil, copper and corn transact far beyond the reach of national regulators.
Capital has also been piling into industrial metals on bets that world demand will rebound strongly from the pandemic, even though it has remained strong throughout. But as higher input costs feed into higher prices for finished goods, affordability falls, and demand tends to shrink along with a shift to cheaper substitutes.
All of this concerns export-dependent manufacturers like China a great deal. Its economy accounts for about half of the world’s commodity demand, and its GDP sputtered to just .6% growth in Q1 2021. This has prompted Beijing to announce new steps to clamp down on commodity speculation, and trading see China targets speculators and hoarders to stop commodity boom. With many prices at cycle highs, an inevitable downside looms.
China stepped up its fight against soaring commodities prices, summoning top executives to a meeting that threatened severe punishment for violations ranging from excessive speculation to spreading fake news.
The government will show “zero tolerance” for monopoly behavior and hoarding, the National Development and Reform Commission said after leaders of top metals producers were called to a meeting in Beijing with multiple government departments on Sunday.
Here is a direct video link.
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