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The factors that lead to instability of commodity price

Consumer prices, for example, jumped 3. The recent price surge is attributed to cost factors from the supply side. China and other major importers of raw materials are fiercely competing to secure supplies, upsetting the demand-supply balance.

  1. The greater concentration of developing countries production and exports in primary products makes their economy more vulnerable to external factors than that of industrialized countries. Also important is securing stable overseas supply sources of major farm products to effectively contain inflationary fears stemming from speculative demand and crop damage.
  2. Producer prices rose 5.
  3. Cost of labour, for example, is a much more important variable for inflation. Even big oil producers such as Saudi Arabia may soon have budget constraints despite the important reserves accrued in the past.

Adverse weather has lowered global harvests, sending prices sharply upward. In fact, the prices of grain, farm produce, livestock and fishery products are spearheading the inflationary spiral. In addition, the U. Imports of finished goods also are spurring upward pressure on prices. Specifically, the prices of Chinese products, which account for 16. Although increased liquidity could be a potential cause of inflation, inflationary pressure from demand side, including liquidity expansion, has yet to turn visible, considering the stable core inflation and the GDP gap ratio, which still remains in the minus territory.

As the main causes of inflation are supply-side factors originating from abroad, it is important to stifle inflationary expectations at an early stage, by focusing on short-term, microeconomic anti-inflation measures that can curb living costs, such as freezing public service charges, stabilizing rents and farm product prices, and discouraging the rise of educational expenses.

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It is necessary to stabilize the price volatility of agricultural products by reducing uncertainty in the domestic crop production and enhancing distributive efficiency. Also important is securing stable overseas supply sources of major farm products to effectively contain inflationary fears stemming from speculative demand and crop damage. To cope with this situation, Korea will need to invigorate direct international transactions of farm products by building overseas food bases and developing overseas food resources as well as improving its agricultural import structure by diversifying supply sources.

In addition, the nation will have to strengthen the management of risks stemming from grain price fluctuations by introducing import methods using futures markets, as well as enhance its ability to cope with agricultural price volatility by using an early warning system to monitor international grain markets.

Causes of Recent Price Instability 1. Domestic Price Situation The consumer, producer and import price indices have all risen in recent months, reflecting the steep inflationary trend.

Consumer prices jumped 3. The price index of fresh food maintained a steep upward slope of 33. Agricultural product prices, the main factor in spiking consumer prices, jumped 26. Producer prices rose 5. Monthly prices of agricultural and marine products climbed more than 20 percent year-to-year throughout the fourth quarter, leading the overall producer prices.

Import prices, too, recorded sharp gains of 12. Also, farm and marine product prices soared 30. The rapid economic recovery of emerging countries from the fallout of global financial crisis and the competition to secure key raw materials among China and other commodity importers have driven up international commodity prices.

Instability of the commodities trade

A series of natural disasters, including severe drought and floods, has led to poor harvests around the world, sharply pushing up foreign and domestic prices of agricultural and livestock products. According to the Food and Agricultural Organization of the United Nations, food price indices surged during the latter half of 2010 to mark an increase of 32 percent from the first half, exerting influence on domestic consumer prices. The prices of major agricultural products, including soybean, wheat and corn, strengthened into the latter half of 2010 because of the unstable supply-demand balance stemming from demand rises in China and other rapidly-growing countries as well as increased demand for bioenergy sources to replace crude oil.

In the 2010-2011 grain year, global agricultural consumption is expected to increase 2.

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The rise in international oil prices pushed up demand for bioenergy sources, including bioethanol and biodiesel, and the prices of their main materials, such as corn, soybean oil and rape seed oil. The ultra-low interest rate and quantitative ease in the United States have resulted in speculative demand for international raw materials, pushing up the prices of crude oil, mineral resources and agricultural products.

The non-commercial net purchase of Dubai light oil sharply increased in the fourth quarter of 2010, exerting influence on its latest price surge. Cost-push pressure increased on businesses operating in China, as the aggravating manpower shortages and minimum wage increases combined to lift labor costs.

Why the fall in oil prices is a problem for everyone

Amid the growing signs of instability on the domestic inflationary front, concerns are also mounting about the possibility of China inflation spilling over into its exports.

China accounted for 16. Consumer inflation is on the upswing overall, but core inflation remained stable at 2. Measures to Ensure Price Stability 1. Short-term Measures The scope of short-term policy options is not broad, as major causes of inflation are supply-side factors originating from abroad.

Therefore, it will be advantageous to place focus on microeconomic price stabilizing steps. It is important to stabilize living costs by, for instance, curbing public service charges. According to the calculation of ripple effects from inflation using the input-out table of 2005, increases in consumer prices caused by public service fee hikes are even bigger than those resulting from higher crude oil prices, pointing to the positive effect of microeconomic price stabilization steps on inflation.

Therefore, the key lies in how to stifle inflationary expectations at an early stage through microeconomic price controlling measures with focus on curbing increases in living costs. Mid- to Long-term Measures 1 Improving the Distribution Structure of Agricultural Products Considering that the demand for farm products is inelastic and their supply is uncertain, it is necessary to place top priority on controlling the factors of price fluctuation in improving the distribution structure of agricultural products.

It is desirable to enhance the storage life of farm products, while minimizing the impact of natural risks such as severe weather and damage by blight and harmful insects. No less important is bolstering the ability to forecast the demand and supply of farm products and expand the coverage of agricultural damage insurance. Equally necessary is to work out ways to stabilize farm product prices by enhancing distribution efficiency.

Both the government and the industry should try to improve the distribution structure at production areas by organizing producers and sorting out farm products through standardization from the harvesting stage. They should also simply the distribution process of farm products and reshape the transaction systems at wholesale markets to low-cost, high-efficiency structures.

Transactions at wholesale markets may attain efficiency and flexibility by introducing free trading and fixed price trading, the factors that lead to instability of commodity price addition to the existing auction system. Farm products importers can secure overseas supply sources through joint and direct purchase. It is desirable for agricultural importers to expand stockpiles through spot and futures markets, and for the government to shoulder part of the costs to to raise the ratios of joint and direct purchase of agricultural products.

The nation needs to reduce price fluctuation risks of farm products by improving its global distribution network. Inflationary pressure may be eased by establishing a major international distributor of agricultural products targeting Asian farm markets. It is also necessary to enhance the ability to cope with price fluctuations by strengthening the market monitoring capacity. It is important to develop the ability to analyze the trends in international grain markets and detect potential risks of price volatility.

  1. Also important is securing stable overseas supply sources of major farm products to effectively contain inflationary fears stemming from speculative demand and crop damage. Therefore, it will be advantageous to place focus on microeconomic price stabilizing steps.
  2. Since the early 1980s, commodity prices have fallen to their lowest levels in 50 years with little hope of any improvement. Measures to Ensure Price Stability 1.
  3. International trade in commodities is characterized by excessive price fluctuations, declining export earnings for producer countries, vulnerability to fluctuations in export earnings, restrictions on access to markets, reductions in the variety of commodities produced, limitations on the degree of processing of commodities by the producers, declining competitiveness of natural products, inadequate market structures, marketing and distribution systems.
  4. Even big oil producers such as Saudi Arabia may soon have budget constraints despite the important reserves accrued in the past. Price instability may make it difficult for producers to take rational investment decisions and may therefore lead to losses of real income through misallocation of productive resources.

The government should closely watch international grain markets and build a database by collecting information on supply-demand situations of grains, price forecasts and degrees of risk, and properly distribute these information to interested parties.