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HAT product best defines the modern world? A Starbucks latte? Or how about a Microsoft PC?


I’d suggest it’s something decidedly more low-tech. Commodities like cotton, wheat and oil may not have a cachet that encapsulates the zeitgeist, but these staple elements still can’t be topped when it comes to shaping our environment. Look at the recent uprisings in Egypt and Tunisia, or Libya slipping into civil war, and you find rising food and energy prices as one of the underlying causes. The figures are all over the news. Global


food prices rose to a new peak in February 2011, according to the United Nations’ Food and Agricultural Organisation (FAO), surpassing the levels of 2008, when they sparked riots in Haiti, Egypt and Cameroon. In the 12 months to the end of February, wheat had risen 58 per cent on the Chicago Board of Trade, and corn a staggering 87 per cent. The UN says the poorest countries are paying as much as 20 per cent more for food than in 2009. According to the FAO, if it wasn’t for rice, the world would be sliding into a full-on food crisis. And it’s not just food. Crude oil has gone


back to over $100 a barrel, after dropping as low as $30 in the wake of the 2008 credit crisis. But perhaps the most startling spike has been in cotton. The New York futures contract for March 2011 delivery rose from 77 cents per pound on 2 August 2010, to a whopping 205 cents per pound on 28 February. These are the highest real-time cotton prices in the US since the Civil War.


The price is wrong The effect of rising commodity prices on the end user in the Western world isn’t always easy to understand. There are a couple of key factors that govern whether price increases are passed on. First, it depends how much of the finished price comes from the commodity. “Gasoline is gasoline, so any price rise gets passed on 100 per cent,”says Daniel Masters,


Director at commodities specialist, Global Advisors (Jersey). “But if you buy a $100 pair of jeans, so many factors affect the final price that when the cost of cotton triples you shouldn’t pay much extra. It’s the producer’s margins that are squeezed.” The other key issue is price elasticity of


demand – dictated by whether people have an alternative. With food and energy, they don’t. UK International Development Minister Alan Duncan warned in March that crude could be heading for $200 a barrel. The current price of £1.30 a litre “could look like a luxury”, he said, even warning it could reach £4 a litre. “Try living without it for a week,” he added. We’d rather not. With oil back on the up, airlines are facing


a 46 per cent hit to their profits this year, according to the International Air Transport Association. Their fuel bill is expected to be $166bn, on revenues of $594bn. And the pain is being passed to passengers: BA, Qantas and Singapore Airlines are among operators adding as much as £40 to the cost of flights. It’s no surprise that the average punter is


frustrated by rising prices. Especially when, as research by UBS has found, many are actually beyond those justified by the price of the commodities themselves. The bank found that commodity price inflation in the first few months of 2011 would justify an increase of 3 to 3.5 per cent in processed food prices, meanwhile supermarkets increased prices by over six per cent. UBS added that food prices in the UK


were ‘anomalous’, rising at an annual rate of 4.9 per cent, compared with 3.6 per cent in Germany and 1.8 per cent across the eurozone. Again, the weak pound was blamed – 18 per cent of the UK’s food is imported, which leaves the nation vulnerable to fluctuations. The effect of rising retail prices looks set


to be widespread in 2011. The CBI has described the forthcoming retail environment as “more challenging”, with prices “set to rise considerably as the VAT increase and the


We’re trapped in a vicious circle: soaring food and energy prices fuel unrest in the developing world, which drives commodity prices higher still


April/May 2011 businesslife.co 23 ➔


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