Commodity Markets and Global Financial Crisis

The impact of the global financial crisis is felt throughout the world today in every sector and industry. While some industries are more fortunate, others are not.  For instance, the banking industry reached a state of collapse and governments intervened and bailed them out in spite of its failures because banks are indispensable. Unlike the banking industry, however, the latest victims of the global financial crisis are the commodities markets. These basic producing industries like oil, cooking oil, vegetable oil, corn, sugar, etc have not been paid much attention by governments. The commodity markets remain under tremendous pressure with the Reuters-Jefferies CRB index, a global benchmark, falling at one point to its lowest level since November 2002.

Commodities are directly linked to economic growth; when growth slows down, commodities are negatively affected as investors globally move out of commodities; and governments are not coming to the rescue.  The CRB index is down almost 52 percent since reaching an all-time high in July.

Most of the commodity prices have crashed in the past few months following sharp declines in global equity markets with mounting fears that the global economy was heading into recession. “A global meltdown is depressing market values at an unprecedented rate,” said Robert Laughlin, a commodities analyst at MF Global in London.

Among the commodities that were hit hard by the financial crisis, palm oil has plummeted 24.8 percent in less than four weeks, 66 percent below its all-time high of M$4,491 in March, as global demand and crude oil prices have collapsed, its lowest level in three years.

The problem of course is the balance between demand and supply of palm oil, as supply has swelled to a record high.  Analysts predict that biofuel; mandates will not ease the current record palm oil supply surplus for at least six months. Indonesia and Malaysia, two major palm oil exporters, are expected to produce 18m tons and 16m tons of crude palm oil this year, respectively. Together, they account for more than 80 percent of the world market (ft.com, August 6, 2008).

Dorab Mistry, a vegetable oils expert at Godrej International in London, said falling crude oil prices, slowing demand caused by a steep bull run, bumper harvests of other vegetable oil crops – particularly rapeseed and sunflower seed – and a bigger bubble in palm oil prices than other commodities were the main reasons for the price fall (ft.com, August 6, 2008).

It’s not only the small companies but large companies are also feeling firsthand the impact of the global crisis. Mr. Kimpun, the secretary of the provincial palm oil producers’ association, stated that practically none of the businesses are making a profit now. “Our members are barely breaking even and that’s only because they’ve stopped workers’ overtime and are economizing wherever they can,” he said. “For example, most people are no longer buying fertilizer, which accounts for about 60 per cent of costs. We’ve no idea what this will do to our yields in six months” (ft.com, October 31, 2008).

The problem dates back to August when smallholders in Indonesia, the world’s largest producer of palm oil, saw their prices soar in August, and the majority of these smallholders capitalized on rising prices to borrow heavily against their land, usually at annual interest rates of about 18 percent, to extend their holdings, buy new vehicles and raise their living standards (ft.com, October 31, 2008). Like many other companies, smallholders in Indonesia were punished for their aggressive growth. “Earnings have fallen by 75 percent in the last six weeks so people are really struggling to service their debts,” said Hidayatullah of the provincial chapter of the Oil Palm Farmers’ Union.

While most commodities have declined, interestingly cocoa prices have been on the rise, says Mr. de Maeseneire, a Belgian who has run Barry Callebaut, the world’s biggest chocolate maker since 2002. London cocoa prices have swung from less than £1,000 a ton in early 2007 to hit a 23-year high Tuesday of £1,820 a ton on supply problems in Ivory Coast, the world’s largest producer, and speculative interest (ft.com, December 23, 2008).