Manisha Pradhananga, Guest Blogger
Remember the 2008-11 food price spike? It led to food riots in many parts of the world and increased the number of malnourished people by 80 million worldwide (USDA 2009). What many people don’t know about the price spike is that besides the rise in magnitude, it was distinctive for the breadth of commodities affected. Prices of a wide range of commodities including agricultural (wheat, corn, soybeans, cocoa, coffee), energy (crude oil, gasoline), and metals (copper, aluminum), all rose and fell together during this period.
Source: IFS, commodity prices. Normalized by demeaning and dividing by standard deviation of each series
It is not unusual for prices of related commodities to move together; if two commodities are either complements or substitutes in production or consumption, then a demand or supply shock in one commodity market may be transmitted to the other. For example, prices of certain industrial metals may move together if they are jointly used to produce alloys. Similarly, prices of grains such as corn, wheat, rice, and barley may move together if they are substitutes in consumption. However, commodity-specific shocks cannot explain co-movement of unrelated commodities, like the one observed in 2008-11 (Gilbert 2010, Frankel and Rose 2009). Many of the factors that were initially given as explanations for the price spike—such as drought, or the use of corn and oil-seeds to produce biofuels—are thus unable to explain this rise in comovement between commodity prices. Only factors that can affect many commodity markets simultaneously can be considered as explanations. In a recent paper, I focus on one of these factors, financialization of the commodities futures market, and explore the links between financialization and comovement.