Recent developments

Following more than two years of strong growth, commodity prices peaked in early 2011 and then declined on concerns about the global macroeconomic and financial outlook and slowing demand in emerging markets, notably China. The biggest decreases were for metals but some of the largest individual declines were among agriculture raw materials (cotton and rubber), edible oils (coconut and palmkernel oil), and wheat. Most indices ended the year much lower compared to their early-2011 peaks—agriculture down 19 percent, energy down 10 percent, and metals down 25 percent.

The recovery in prices in 2009-10 was due to strong economic growth, re-stocking in China, and a number of supply constraints. In early 2011, several disruptions, including drought and heavy rains that affected most agriculture markets as well as coal and mineral output in various locales, pushed prices to annual highs. Political unrest in North Africa and the Middle East resulted in a loss of significant oil supplies, most importantly in Libya. As markets absorbed these disruptions and supply conditions improved, prices began to come under additional downward pressure from slowing demand and uncertainty about the near-term economic and financial outlook.

Commodity prices are generally expected to decline from their high levels in 2012 due to a slowdown in demand and improved supply prospects—in part because high prices have led to greater investment. Crude oil prices are expected to average $98/bbl in 2012, assuming the political unrest in the Middle East is contained and Libyan crude exports return to the market. Metals prices are expected to decline by 6 percent in 2012 on moderating demand and commissioning of new supply projects—partly the result of a lengthy period of high prices. Food prices in 2012 are expected to average 11 percent lower than 2011, assuming a normal crop year and a moderation in energy prices.

Key nominal annual price indexes--actual and forecasts (2005=100)

There are both upside and downside risks to the forecast. Continuation of political unrest in the Middle East and North Africa could lead to further disruption of supplies and higher oil prices in the shorter term—especially given low stocks and a market short of light/sweet crude. Strong demand by China, including for re-stocking, could keep metal prices higher than projected, and a continuation of supply constraints that has plagued the industry the past decade could further aggravate markets.
Given low stock levels in some agricultural markets (especially grains), prices are still sensitive to adverse weather conditions, energy prices, and policy reactions. Moreover, the diversion of food commodities to production of biofuels (it reached almost 2 million barrels per day crude oil equivalent in 2011), makes markets tighter and more sensitive to weather and policy responses.

Downside risks entail mostly slower demand growth due to the deterioration of the debt crisis, especially if it expands to emerging countries where most of the growth in commodity demand is occurring. The downside risks apply directly to metals and energy, which are most sensitive to changes in industrial production, and indirectly to agriculture.