EX: Commodity prices fall; what does it mean to consumers
Commodity prices world-wide fell Monday as a result of the economic problems in Europe, a slow down in China, and the less than expected May jobs report in the U.S. Oil prices continue to fall, copper and gold prices are dropping, and corn prices have also dropped.
According to an article in the Washington Post, on Monday, cotton fell to a 31-month low. Sugar hit a 21-month low. OPEC’s crude oil slipped below $100 a barrel for the first time in nearly eight months. It was $120 earlier in the spring. U.S. crude was down to $83 a barrel down from $106.Corn prices have also dropped.
“We’ve seen a decline in corn prices over past few months,” said Barton Schott, a third generation farmer in Kulm, N.D., who is chairman of the National Corn Growers Association. “I think it’s all related to the world economy and price of the dollar,” he said, adding that “outside investors” and investment funds that had been big buyers earlier in the year had reversed course and started selling corn a month and a half ago.
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So, is this good or bad? It depends on what side of the table you are on. Lower commodity prices mean lower profits for the copper companies, gold mines, and oil companies. It means lower profits for commodity traders and speculators. Farmers suffer from lower cotton and corn prices.
On the other hand, consumers benefit. Lower corn prices could result in lower costs at the grocery store on everything from cereal to everything made with corn syrup, which is almost everything. It will also lower cost of ethanol used in gasoline. A drop in cotton prices could lower cost of clothing, and other things made from cotton.
Lower gas prices certainly benefit everyone who drives, but also it lowers the costs of delivery of raw materials and finished goods, which could reduce the upward pressure on prices. It could also lower air fares. The economy benefits because the money not going to oil companies at the pump, goes to local businesses because motorists have more to spend on other thing.
It also reduces inflation, or at least fears of inflation. That opens the door for the Federal Reserve to do things to stimulate the economy without fears of inflation. I think it remains the case that deflation should be more the concern of public officials than inflation,” said Edward Morse, head of global commodities research at Citigroup.
“This provides a green light for more stimulus, particularly monetary stimulus,” said Mark Zandi, chief economist of Moody’s Economy.com. “With lower commodity prices, you get lower inflation.” He said he expects central banks “to press on the accelerator” and to engage in quantitative easing, a method of easing interest rates by buying securities.”
Don’t’ get too excited yet. Although prices are dropping, they are still high and have a way to go to get to 2008 levels. The trend downward affects inflation more than the actual price, however, and the downward trend could be a good thing.
What is causing this? It is a drop in demand. The recession in Europe, the lingering damage caused by the Bush recession in the U.S, and a slowdown in China has reduced demand for raw materials such as copper as well as commodities like corn and cotton.
As for oil, production is up and demand is down. Most of the growth in oil demand is being generated by four countries: China, India, Saudi Arabia and Brazil.” In Europe and the United States, oil demand is flat or declining according to the economist for Barclays Bank. Now, demand in China has slowed with a drop in factory output, fewer Chinese are working and like in the U.S., they drive less to compensate.
Governments could solve the lack of demand if they chose. In Europe, they could ease the austerity program that has sent several countries into recession again. Chine is already considering a stimulus. Congress could pass an infrastructure and highway bill and put people back to work. That is not likely with Republicans in charge.
