The commodities conundrum...

Theory backed by empirical evidence tells us that during an economic downturn, commodity prices follow suit, acting as a sort of barometer on the level of economic activity (i.e. in times of global expansion, there would be greater demand for scarce resources and vice versa).

There is heated debate in the current environment as to whether this relationship still holds, given that almost all commodities are at or close to record levels. The answer is important because it could determine the extent and duration of the turmoil at hand (higher commodity prices that remain sticky would deteriorate further an already fragile economy through its adverse effect on spending, not to mention ravages of inflation).

Why are prices so stubborn in the current downturn you may ask? Well, apart from the speculative money that has been driving prices higher we have secular trends that are starting to play an increasingly deterministic role on pricing. The emergence of China and India as global centers for production and services have led to the creation of a distinct middle class with greater spending power and resulting shift in lifestyles. One of those changes concerns food (or the move towards a more protein rich diet). Another is the growing population (more mouths to feed) or manmade environmental changes (freak weather conditions such as extended droughts) or even flawed government policies (food crops reallocated to the production of fuel). All these factors are likely to have profound and, in some cases, long lasting impacts on scarce resources across the board.
It should come as no surprise therefore that commodities will be amongst the most serious issues that will need to be tackled this century. Again, no surprise as it is, after all, a case of forcing mankind's infinite needs and wants in a world of finite resources.