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Oil, food and metal - all getting more expensive

Feb 24, 2011 02:13 PM

The prices of a tank of gasoline, a loaf of bread and a gold coin are likely to rise in the coming weeks.

Commodity futures of every type are gaining as the rising level of global conflict makes investors aware of the risks in an increasingly unstable world.

The trend really began last year when weather events hit critical grain-growing regions. The drought and fires in the Black Sea area of Russia and the Ukraine led both countries to stop exporting wheat and other cereals, pushing up the prices of those commodities. The devastating floods in Pakistan and Australia also played a role, putting pressure on suppliers in the United States, Canada and other major growing nations.

Investors also bought into gold futures and silver futures, seeing the precious metals as a source of security. Gold climbed nearly 30 percent in 2010, while silver rose over 80 percent.

Now, oil has come into play. Some of the blame for the unrest in Tunisia, Egypt, Libya and other Middle Eastern nations undoubtedly lies with the rise in food prices; Egypt is the world's single largest importer of grain, and millions of Egyptians rely on government-subsidized bread to survive.

Crude oil futures are rising to levels not seen since shortly before the financial crisis of 2008 brought the global economy to its knees. West Texas Intermediate light, sweet crude oil futures for April delivery climbed briefly to above $103 per barrel before slipping to $96.10 per barrel.

April Brent crude futures - which more closely track European supply and demand and are thus more sensitive to the revolution in Libya - spiked to $119 per barrel before slumping to $110.20.

Meanwhile, gold is up over 8 percent since its recent low of $1,308 per troy ounce in January.

"Gold prices rallied in the aftermath of the Iranian hostage crisis in 1979, the Soviet invasion of Afghanistan and at the beginning of both Gulf wars," James Steel, a precious metals strategist at HSBC, told the Financial Times. "The geopolitical risk component of market risk is again on the rise due to political dislocation in the Middle East and North Africa."

The three trends are interrelated and interdependent. Food production isn't keeping up with global growth, both in raw population and total consumption, and the recent severe weather events haven't helped that situation any. In addition, rising fuel prices impact every major agribusiness, a serious concern in today's increasingly industrialized agricultural sector. Precious metals rise off of the general nervousness on display, and speculative investors jump in as volatility increases.

The United States Department of Agriculture is warning that 2011 will be a year with sustained high prices for agricultural goods. 

"While it is often said that the cure for high prices is high prices, even with additional supplies expected this year, it is likely that the tight stocks-to-use situation will not be entirely mitigated over the course of one or even two growing seasons," said Joseph Glauber, the USDA's chief economist, at the USDA Outlook Forum in Washington, DC.

The federal agency forecast that the average price for corn in 2011 will be $5.60 per bushel; for wheat, $7.50 per bushel; and for soybeans, $13 per bushel.

On Thursday, corn futures were down at $6.94 per bushel, soybean futures were down at $13.285 per bushel and wheat futures were down at $7.81 per bushel.

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