Recent Drivers of Global Commodity Prices: An Exploration

This chapter looks into the trends in global commodity prices (CPs) since 2000 and tries to discern the major responsible factors. In terms of stylized facts, global CPs are seen to be following an upward trajectory over 2000–2008; after the onslaught of global financial crisis, the CPs seem to have experienced major dip in 2009, only to get rebounded next year onwards. As far as the factors behind CPs are concerned, three reasons are highlighted: (a) increased global demand for the commodities (emanating also from the emerging economies like China and India); (b) speculation in the commodities markets or financialization of commodities; and (c) presence of global liquidity emerged out of expansionary monetary policy by the advanced economies, reflected both in terms of low interest rates and huge liquidity injection via quantitative easing. In order to test it econometrically, a vector autoregression (VAR) model is built up with the following variables: global production, stock prices (SPs), CPs, and global interest rates. The VAR model is run for the whole period 2000–2011 as well as a more recent period 2009–2011. Interestingly, in the recent period, SPs and interest rates together tended to explain as much as 35 % of CP variance. If we replace global interest rate by the size of the US Fed balance sheet (as a proxy for global liquidity), proportion of CP variance explained by industrial production goes down drastically and that of the speculation increases drastically. Going forward, global liquidity and speculation could play a significant role in determining trends in CPs.