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As prices for basic farm produce and raw industrial materials continue to rise, senior United Nations officials call for urgent action to be taken to rein in volatile commodity markets.

Supachai Panitchpakdi, the secretary-general of the UN conference on trade and development (UNCTAD), has stated that price volatility continues to hit the poorest the hardest.

“Such volatility has huge negative impacts on vulnerable groups, such as low-income households in developing countries, for whom food expenditure can account for up to 80% of household budgets,” he told delegates at the agency’s second commodities forum held in Geneva this week.

Despite a temporary slump in prices at the height of the financial crisis, commodities have resumed pre-crisis levels. Sugar and cotton hit 30-year highs at the end of 2010. Copper is up 35% since mid-2010 and oil is also trading around the US$90 per barrel mark.

“There are serious concerns about the way in which commodity markets have been evolving in recent years. Since mid-2010, commodities have, for the second time in three years, been experiencing extremely high price volatility.”

He spoke of “speculative distortions that complicate the economic management of commodities production and trade”.

The ‘financialisation’ of commodities was a key focus of the conference, with many expressing the belief that the increasing number of investors seeing commodities as a financial asset through which they can secure high returns, rather than as a physical entity, was fuelling volatility.

Environmental events such as fires in Russia and the Pakistan floods also pushed up commodity prices in 2010, and demand for the growing economies such as India and China are similarly fuelling price increases.

With the world only entering a fragile recovery, Andrey Vasilyev, deputy executive secretary of the UN Economic Commission for Europe, told the conference that rising commodity prices might impose negative inflationary pressure on economies.

He urged that it was important that commodity prices should reflect economic fundamentals of supply and demand, and that the influence wielded by speculators should be reduced.

Pascal Lamy, director-general of the World Trade Organisation, spoke of the need to complete the Doha Round on world trade rules as a way of smoothing out some of the volatility. He noted “tariff walls, price suppressing subsidies, and restrictions on exports” as contributing factors to rising prices.

“Volatility is at its worst in tight and closed markets. It eases in open and, hence, deeper markets,” he added.

Rather than blaming financial speculators, Lamy spoke of export taxes and export restrictions being the “single most important reason” for the price explosions in the rice market in 2007-08.

He also pointed to the price escalation of cereals in Russia and Ukraine in 2010 being as a result of constricting export and trade regulations.

Conference speakers added that commodity-dependent developing countries should not rely on the rising commodity prices as their main income stream, and should work to diversify their economies and invest in infrastructure and other industries.

UNCTAD’s Panitchpakdi highlighted Botswana, Mauritius and Brazil as successfully diversifying and managing their commodity-reliant economies.

Speaking specifically on oil markets and Iraq’s re-emergence as a major oil producer, Iraq’s deputy prime minister for energy affairs, Hussain Al-Shahristani, asserted the belief to delegates that oil price volatility is being fuelled by speculation.
There is, he told delegates, “a broad acceptance that volatility in the oil market was driven by speculation and not by market fundamentals. Oil has emerged as an asset rather than as a commodity.”

Fellow panellist, Ali Ibrahim Al-Naimi, Saudi Arabia’s minister of petroleum and mineral resources, echoed such views saying: “I believe it can be explained in part that in recent years, oil has become well-established as an attractive asset class for a growing and diverse set of investors.

“This trend appears unlikely to abate anytime soon unfortunately, and is likely to contribute to the ongoing volatility as investors’ money moves in and out of oil future markets based on a variety of factors that may have little to do with basic oil supply and demand fundamentals.”