Commodities and Rising prices: 2022 outlook and overview
A rapid increase of wheat, heating oil, natural gas, palladium, and others commodity prices has become a key topic over the last few months of 2022.
Commodities and Rising prices: 2022 outlook and overview
Commodities
A rapid increase of wheat, heating oil, natural gas, palladium, and others commodity prices has become a key topic over the last few months of 2022.
There are many reasons for the rises. The Covid pandemic created a very unusual situation, where in 2020 oil futures even reached negative territory. Luckily, the world is slowly returning to some sort of normality following the massive vaccination campaign. However, supply lines and resources remain stretched, where demand has mostly recovered to close to pre-pandemic levels created an unusual situation, where there is demand but not enough supply, as explained by the World Bank, which in the current situation means that a downturn is followed by a rapid increase in commodity prices.[1]
However, what is unusual in this situation is that economies are still stretched due to the unprecedented financial support provided during the pandemic period. Globally, the figure is estimated to have been around 12.5 trillion USD, whilst the estimates for the UK are around 368 billion GBP.
Atop of these impacts, we also have a conflict in Europe between Ukraine and Russia, where sanctions have been put in place, along with severe trade restrictions, which have further stretched supply lines for several key commodities such as oil, natural, gas, and wheat given that both countries are major exporters in some of these goods.
Effect of rising commodity prices
At least in Europe under the EU regulation every country is allowed to take whatever measures they deem necessary to protect their citizens. So far in 2022 we have seen a huge impact on all these conditions coming into play. The unprecedented rapid rise in both oil and gas is having a huge impact on businesses and consumers.
Still the effect of the rising commodity prices is evident in other countries as well, where regulators were forced to increase energy prices to record highs. Just in the UK energy prices have risen to unprecedented levels, where the cap was lifted from 1277 GBP to 1971 GBP (54% increase), with projections being that it could rise to 2,800 GBP by October.
Energy prices are one spectrum. The other one is the spike in food commodity prices, which is impacting countries that depend on food imports. Most have risen by 23% since last year and its’ impacting everything from meat, dairy, oils, and other essentials.
The most impacted are developing economies, where most of the population depends on staple foods, and some of them are imported.
The Food and Agricultural Organization of the United Nations (FAO) published their latest report https://www.fao.org/3/cb9427en/cb9427en.pdf covering the outlook for 2022 and all major commodity prices.
- Wheat prices have risen to levels not seen since 2008 due to the reduced harvest in several major exporters thus pushing global production of 770.9 million tones, representing a 0.8% decrease year on year
- Coarse grains (covering maize, barley, sorghum, millet, rye, oats and others) are also seen rapid price increases, where the Russia-Ukraine conflict has put pressures on the market. The top importers of coarse grains are China, Mexico, Japan, Republic of Korea, Vietnam, Egypt and others
- Vegetable oils prices have also risen dramatically, where the oil crops index had risen by 40% year on year.
Ways to improve the situation
The situation is dramatic as explained before because the world has just emerged from the first major health crisis of the 21st century and most economies have stretched budgets, and resources, especially developing economies, which cannot tackle the current situation effectively.
These increases cause problems on multiple levels, especially on consumers, where given the pandemic, budgets are tight and tackling food and energy increases is creating an impossible situation for them.
That is why a lot of European countries have implemented a combination of governmental subsidies, tax cuts, energy price cuts, and/or a combination of all these, especially for energy prices. In the UK the government was forced to take drastic action and raise 12 billion USD windfall tax on energy firms to reduce some of the energy cost for consumers. Bruegel provides a very good overview on the measures taken by most European countries: https://www.bruegel.org/publications/datasets/national-policies-to-shield-consumers-from-rising-energy-prices/
In such a situation there are no easy solutions and require a great deal of co-ordination, governmental intervention, and enhancement to tackle the crisis at hand or else millions of people would be put in an unprecedented situation.
Sources used (not an exhaustive list):
Commodities 2022 | S&P Global Commodity Insights | S&P Global Commodity Insights
Global Commodity Markets Outlook for 2022 - CTW
Hedge funds are doubling down on commodities bets with some notching big gains
Prices of energy commodities to remain elevated for months - Economist Intelligence Unit
UK energy bill cap expected to rise to around £2,800 — regulator
Check if the energy price cap affects you | Ofgem
What does the energy price cap mean for you? | The Independent
How negative oil prices revealed the dangers of futures trading
Commodity price cycles: Causes and consequences
IMF sees cost of COVID pandemic rising beyond $12.5 trillion estimate | Reuters
The public finance cost of covid-19 | The BMJ
Wheat | OEC - The Observatory of Economic Complexity
Price cap to increase by £693 from April | Ofgem
European Energy Consumer Prices » Natural Gas, Electricity and petrol
Factbox: Europe's efforts to shield households from soaring energy costs | Reuters
The European Union demand response to high natural gas prices | Bruegel
The Cost of Living in the U.K. Imperils Vulnerable Britons - The New York Times
UK inflation jumps to 40-year high of 9% as food and energy prices spiral
Britain scrambles $12 billion to soften 54% household energy price blow | Reuters
War-Fueled Surge in Food Prices to Hit Poorer Nations Hardest – IMF Blog
Global food prices inflation | Deloitte Insights
FAO GIEWS Country Brief on Egypt -
New UN Food Outlook report: World’s most vulnerable are paying more for less food
Building a procurement strategy during inflation | McKinsey
Commodity prices soar to highest level since 2008 over Russia supply fears | Financial Times
Companies use inflation to hike prices and generate huge profits, report says - CBS News
As inflation grips small businesses, here’s how they are responding
What can the government do to stop or slow inflation? - ABC News
Which countries are doing the most to tackle energy bills? - BBC News
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