The 2006-08 commodity boom was one of the longest and broadest of the post-WWII period. The boom - and especially the 2008 rally, when crude oil prices peaked at US$ 133/barrel (up 94 percent from a year earlier) and rice prices doubled within just five months - has renewed interest in the long-term behaviour and determinants of commodity prices, and raised questions about whether commodity prices have reversed the downward course that most of them followed during most of the past century. It has also produced numerous calls for coordinated policy actions at the national and international level to address food availability and food security concerns.
To put the recent commodity boom into perspective calls for a good understanding of the key characteristics and determinants of long-term commodity price movements and an appreciation of how limited this understanding is, especially with respect to the conditions under which the recent boom unfolded. Such a perspective is important in order to avoid policy pitfalls that in the name of mitigating food security concerns or improving the functioning of the markets may, in fact, exacerbate existing problems.
This paper has two objectives. The first is to analyze the nature of the recent boom, especially in food commodities, by examining which key factors fuelled it and whether such factors are likely to remain in place in the long term. The second objective is to place the boom into perspective by examining long-term trends and characteristics of commodity prices. It begins with a discussion of recent price trends, including the causes of the boom as well as a comparison with earlier episodes of high prices. Particular attention is paid to three key (real or perceived) causes of the boom: excess liquidity and speculation, food demand growth by emerging economies, and use of some food commodities to produce biofuels. Section 3 analyzes the long-term behavior of commodity prices, including stationarity, co-movement among prices of food commodities, and the price link between energy and non‐energy commodities. The final section summarizes and discusses some policy issues, including the rationality and viability of proposals for dealing with price spikes.
The authors conclude that a stronger link between energy and non-energy commodity prices is likely to have been the dominant influence on developments in commodity, and especially food, markets. Demand by developing countries is unlikely to have put additional pressure on the prices of food commodities, although it may have created such pressure indirectly through energy prices. They also conclude that the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by investment funds may have been partly responsible for the 2007/08 spike.

By: J. Baffes (The World Bank), T. Haniotis (European Commission)

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