The IMF had a lot to say about oil which received widespread publicity butwhat about the outlook for for non-oil commodities?
Not many commentators bothered to take a look, they should have. The comments on food and biofuels raise a number of questions for farmers and the emerging alternate fuels sector.
The IMF isn’t very convincing on the outlook for metals: the forecasts have been overtaken by the speed of the current rebound.
Buton food and biofuel commodities, it is spot on and very worrying, especially about the feeling of some promoters of alternate fuels that their time has come.
They haven’t and it’s only by dint of subsidy and tariff in the US and by EC mandate, that biofuels such as biodiesel and ethanol are viable in both regions.
Without this official protection and support they are uneconomic compared to Brazil. The impact on the huge US corn and soybean markets is destabilising and will boost food prices, and inflation.
So what did the IMF say?
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The IMF nonfuel commodity index rose by 28 percent in 2006, ending the year at a new record high, driven by a surge in metals prices and a strengthening of agricultural prices.
In the first three months of 2007, metals prices fluctuated, but generally remained strong, while agricultural prices continued to rise, albeit at a slower pace.
The nonfuel commodity index is expected to increase further in 2007 as the strength of food and metals prices should carry forward.
METALS:
Metals prices rose by 57 percent during 2006, by far the largest increase among the main categories in the IMF commodity index.
This reflected continued strong demand growth, increased labor disputes, and unplanned disruptions to supply.
Strong growth of demand for stainless steel and automotive production, particularly in China, contributed to sharp price increases in nickel, zinc, and lead. Uranium prices rose by 71 percent, spurred by the recent revival of interest in nuclear energy.
Copper prices have come down from their mid-2006 record-high levels, in part reflecting the slowdown in the U.S. housing market and weaker Chinese demand in the second half of 2006. (But as we have seen that has been reversed in the last two months with strong Chinese buying and rapid price rises. The IMF is a bit behind events).
Looking forward, copper and zinc prices are expected to weaken as new capacity comes on line. (And again there seems to be some doubt about that happening this year The Chilean Copper Commission of experts, for example, has raised long-term copper price projections by more than 20 percent in the last year.)
In contrast, nickel, tin, and uranium still face more serious supply constraints and, therefore, higher possibility of upward price movements.
Over the longer term, all base metals prices should weaken from their current highs as output continues to catch up with demand, although higher long-term production costs (wages, fuel costs, and equipment costs) are likely to keep prices above historical averages.
FOOD AND BIOFUELS:
Food prices rose by 10 percent in 2006, driven mainly by surging prices of corn, wheat, and soybean oil in the second part of the year.
Recent price increases have reflected a poor wheat crop in major producing countries (which pushed wheat stocks to their lowest levels in 26 years) and rising U.S. demand for ethanol (which uses corn as an input) and prospects of higher biodiesel demand (which uses soybean oil and other edible oils).
Looking ahead, rising demand for biofuels will likely cause the prices of corn and soybean oil to rise further and to move more closely with the price of crude oil, as has been the case with sugar.
For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton.
Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise.
Higher prices of corn and soybean oil will also likely push up the price of partial substitutes, such as wheat and rice, and other edible oils, and exert upward pressure on meat, dairy, and poultry prices by raising animal rearing costs, given the predominant use of corn and soymeal as feedstock, particularly in the United States (more than 95 percent).
(The most common crop rotation in the United States is between corn and soybeans, the latter providing a replenishing source of nutrients to the soil. The United States is the largest global producer of the two grains.)
Prices of rapeseed oil (or canola, used to make biodiesel in Europe and Canada) and palm oil (used in Malaysia) have also risen.
The early adoption of sugar-based ethanol in Brazil for flex-fuel cars has led to increasingly strong co-movements of sugar, ethanol, and crude oil prices.
The exception was the fall in sugar prices in mid-2006, reflecting an abundant Brazilian sugar crop in combination with import protection of U.S. ethanol, which to some extent has segmented the ethanol market.
Furthermore, since corn is more energy intensive than soybean in production, high crude oil prices could also raise corn production costs. Recent proposals to increase biofuel production in the United States and Europe will likely put additional upward pressure on corn, wheat, and edible oil prices.
Plans to double the minimum mandated biofuels consumption in the United States-the largest ethanol consumer- by 2017 would require an estimated 30 percent rise in corn production (or a corresponding reduction in exports) over the next five years to increase ethanol capacity, unless the higher demand is partially met by easing restrictions on imported ethanol-a plan that is currently not being considered.
Ethanol produced in the United States enjoys ample protect
