The Lessons of High Commodity Prices

Part of the argument regarding global trading has been the uninformed view that commodities from low-income countries are available at low prices hence the poverty of farmers and the citizens of commodity exporters. Less informed commentators even suggests that there is a widespread conspiracy to keep citizens of low-income countries poor by depressing the prices of these commodities. Prices of agricultural and other commodities have risen substantially in the last three years and this has been a boom for the citizens of these countries who grow these commodities.

One of the commodities that has seen a rise in prices internationally is palm oil from which is produced most edible vegetable oils. This story shows that the price hike has led to rising incomes but the more important factor driving that trend is the rise in demand for the product. Indeed, the increased demand is a boon but it has had several unintended consequences. One of these is that fact that food prices are trending upwards too with serious consequences on the ability of low-income people to purchase sufficient amounts. Equally interesting is the smuggling and movement of the product to markets where the subsidy levels are lower such as Singapore. The differences in policy are creating real opportunities for arbitrage and more market distortion.

As the high prices provide incentives for growing more crops both for bio-fuels and for food, the products will find use in the industries that will ensure higher returns for the producers. The lesson is that the clamour for higher prices for commodities is fine but efficient markets should be the better choice. As is expected with commodities, the real prices will come down over time even if it looks extremely idiotic to mention that in January 2008.