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Trends and Cycles in Global Commodity Prices
David S. Jacks, Simon Fraser University and NBER
Paul Ehrlich, a biologist, won fame in 1968 for
his book, “The Population Bomb”.
Julian Simon, an economist, responded with his
book, “The Ultimate Resource”.
This gave rise to the Simon-Ehrlich wager, a bet
on the direction of metal prices from 1980:
Ehrlich lost…decisively and quietly.
From boom to bust?
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In the past few years, large increases in
commodity prices have led to the view that the
world is quickly running out of key materials.
The necessary consequence of this scarcity is
that economic growth must grind to a halt.
But for others, this view is misguided as history
suggests otherwise.
From boom to bust?
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My contention: we have to start with the idea
that real commodity prices are cyclical.
That is, real commodity prices have both trends
and cycles which may be long in duration.
Because of this, long-run patterns can be easy
to miss because we confuse cycles for trends.
From boom to bust?
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But what are the sources of this cyclicality?
(1) surging demand related to episodes of mass
industrialization and urbanization; and
(2) acute capacity constraints, in particular, for
energy, metals, and minerals.
The result being above-trend real commodity
prices for years, if not decades on end.
From boom to bust?
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As cycles and trends can span decades,
we need very long-run commodity price data.
As cycles and trends can differ across goods,
we need a wide range of commodity price data.
I have collected annual price data for 40
commodities back to 1900, representing 8.72
trillion USD of production in 2011.
New data on old prices
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Prices drawn from the animal product, energy
product, grains, metals, minerals, and soft
commodity sectors.
They are all expressed in USD given its role in
global commodity markets.
They are also deflated using the US CPI:
a dollar from 2000—much less to say 1900—
is not worth the same as a dollar in 2015.
New data on old prices
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Trends and cycles since 1900
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Trends and cycles since 1900
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Trends and cycles since 1900
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Thus, real commodity prices increased by
roughly 0.75% per year in real terms from 1950.
This decomposition also suggests that 2012
marked the peak of above-trend pricing.
However, this “bird’s eye” view masks
important differences across commodity type.
Trends and cycles since 1900
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In particular, we need to distinguish between:
1.) “commodities in the ground”:
energy products, metals, minerals;
roughly speaking, non-renewable resources.
2.) “commodities to be grown”:
animal products, grains, and soft commodities;
roughly speaking, renewable resources.
“In the ground” versus “To be grown”
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“In the ground” versus “To be grown”
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“In the ground”
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“In the ground”
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“To be grown”
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“To be grown”
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So, real prices for “commodities in the ground”
rose by roughly 180% in real terms from 1950.
While real prices for “commodities to be grown”
fell by roughly 33% in real terms from 1950.
And typically, cycles in commodities “to be
grown” preceded by those “in the ground”…
not so this time around.
“In the ground” versus “To be grown”
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But where are we left in terms of trajectories?
Analysis of trends and cycles primarily a
descriptive exercise, not one of forecasting.
Critical role of 1998: lowest real commodity
prices since 1933 as well as a turning point in all
medium-run cycles but with lags.
Critical role of China: largest urban migration in
world history; 1990−2010 from 302 to 666 m.
Future prospects
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The transition from fixed capital accumulation
to a consumption-based economy —and
suburbanization—is tentatively beginning.
If CPC is successful in this effort, likely to see:
(1) increase in demand for goods “to be grown”
and an inflection in long-run trend(?)
(2) below-trend prices for goods “in the ground”
and formation of new cycle in medium run(?)
Future prospects
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Thank you.
Contact:
David S. Jacks
[email protected]
www.sfu.ca/~djacks
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