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Commodities


BA is one of many airlines passing huge rises in fuel prices on to their customers


soaring cost of raw materials are passed on to shoppers”. Bank of England Governor Mervyn King went as far as warning that households now face the biggest squeeze on living standards since 1920. Cotton bore the brunt of the blame when street-wear brand Fenchurch went into administration in March, putting 40 head office jobs at risk.


The blame game Unfortunately, we can expect much more of that this year. And when all looks so unrelentingly grim, it’s nice to have someone to blame. Public enemy number one here are hedge funds, accused of irresponsibly buying and selling short on commodities. French President Nicolas Sarkozy recently branded such speculative activity “pillaging… simply


Cotton on


In the year to 9 March 2011, the price of cotton rose over 154 per cent as demand outstripped supply. While this may be good news for farmers, it is putting pressure on the garment-manufacturing industry, which is caught between higher costs and pressure from the clothing industry to keep costs low.


Cotton front month futures (in US cents) 200 175 150 125 100


Mar 2010 May 2010 24 businesslife.co April/May 2011 Jul 2010 Sep 2010 Nov 2010 Jan 2011


extortion”, and both Washington and the EU are now amending their trading legislation to curtail excesses. There’s no law against this kind of trading,


but it has been widely criticised as morally dubious to be toying with the prices of essentials that others much less well-off require to live. Yet numerous studies have failed to find any link between price fluctuations and commodity derivatives trading. Masters is quick to direct the blame away from the speculators. “There is no bogeyman,” he says. “Prices aren’t being driven by evil forces with big pots of money – people have done this to themselves by voting in the policy makers.” So if evil speculators aren’t driving up commodity prices, what is? Turns out it’s


something far more prosaic. The Interagency Task Force looked into oil prices in July and attributed the rises to a simple matter of supply and demand. While demand for oil in the West has


been tepid since the crisis, the hunger for growth in Asia has been escalating the whole time – whereas the opposite is the case for supply. “The apparatus for expanding commodity production just isn’t there,” says Masters. ”There was a two-year hiatus in production after Lehmans went down, and demand in the West fell off a cliff. And it’s just as difficult to get financing to build an oil field now as it is for an individual to get a mortgage.” It’s the same for food. Bad weather has


ruined crops from Canada to Australia, Russia banned grain exports after its worst drought in half a century, and vulnerable governments from Algeria to Bangladesh are stockpiling food. Meanwhile the global population is soaring, and the middle classes are expanding in areas like China, demanding more resource-heavy foods like meat. And let’s not forget that farmers need that expensive energy to produce food.


Money matters There’s also the issue of weakened currencies. The parlous state of the dollar is actually why we see a perceived rise in commodity prices in the first place. Compared to gold, the oil price has remained remarkably stable. It’s simply the fact that the dollar is packing less of a punch that makes oil feel more expensive. “Politicians are trying to win votes by printing money, but in the longer term the currency gets debased,” says Andrew McGowan of


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