Tuesday, December 30, 2008

Commodities to Stablize, But Prices Could Stay High

Recall all the talk earlier this year about speculators and price volatility. The claim was that speculation was leading to extremely high costs. Although there was a some truth to that, those same speculators took a bath when costs dropped.

As a recent AP article reported, "'People bought oil and commodities because they thought the rest of the world would continue to consume,' said Phil Flynn, senior energy analyst with Alaron Trading Corp. 'They were wrong. And they were wrong in a spectacular fashion.'"

And that wild speculation that drove prices so high also helped make it so that prices in some sectors, especially fuel, have dropped so low in recent weeks.

While market fluctuations are inherent in a market economy (and I think complaints about fluctuation are often misguided, or at least overstated), one problem will take longer to work out. Unlike fuel, which tends to respond rather quickly to changes in input prices, food takes a while to work out. As the AP article notes,
Food prices are likely to take longer to come down. While the prices for wheat, corn and other grains have declined, and the gasoline used to transport food is cheaper, meat prices are likely to remain high because farmers have thinned out their herds. And, processed food like cereal has many more factors than ingredients that determine how much they cost — labor, packaging and marketing all figure into the mix.
One of the problems with food production in a modern (read: processed) market, is that the costs are complex and varied. Because of that, costs seem to move up quickly, but down very slowly. While market fluctuations are hard on every market, it appears food impacts are among the longest lasting. As the next administration considers energy, food, and economic policies, we can only hope they recognize that none of these areas are independent of the others.

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