The rise and rise of commodity prices reflects an economicrevolution occurring in New Zealand’s backyard. The breadth of this commodityboom is impressive and is being driven by two fundamental forces – populationand income growth. That suggests that high commodity prices may persist forseveral more years, and possibly even a decade or two. In some cases the liftin prices could be permanent.
The last big commodity cycle was back in the early 1970swhen agricultural prices surged on the back of fast population growth and pooragricultural practices especially in what was then the Soviet Union. Foodprices in real terms in the 1970s were, in some cases, several times higherthan they are now.
New Zealand experienced a big lift in prices for mostcommodities and the terms of trade leapt 45% in the space of just two years.The oil crisis followed and the boom times of the early 1970s (for New Zealand) were replaced with debilitating inflation and anaemic growth.
The current commodity cycle looks altogether different fromthe early 1970s boom, especially in terms of its potential longevity. But it isdangerous to start claiming that the world has changed. Too often such changesprove surprisingly fleeting, witness the short-lived new economy of the late 1990s.
The reason this commodity cycle might prove longer-lastingthan any we have seen for possibly a century is that more people with higher incomes,particularly in emerging economies, are pushing up demand for resources.
Since 1970 the world’s population has grown by more than twobillion people, or around 50%, and it is likely to increase by another 50% by2050.
More importantly, the economies of a significant bunch ofthe world’s poorer countries in 1970 have been growing rapidly and thesecountries now have sizeable middle class populations. China and India probably have more people with incomes equivalent to middle income Americans thandoes the US. Over the next couple of decades the number of middle income Asianswill most likely double, as fast economic growth seeps down to the vast numberof people waiting to engage in the formal economy.
China and India are by no means the only economic bolters in Asia. Vietnam with 86m people and Indonesia with 237m are just two up-and-comingeconomies that are quickly hoisting hoards of households into developed economystatus. These households will have the incomes, spending power and desire to consumeresources – more and better food, fuel and energy, better housing, household appliancesthat we take for granted, etc.
Although the rate of population growth may well slow in Asiaover the next 30 years, there will remain a huge number of people in these countrieswaiting to join the formal economy and get the skills, incomes, and jobsecurity that will enable them to live more comfortably. Just think for amoment, as you read this, what it would be like if just 50% of Chinese andIndian families were able to live like you are now – heater going, the car inthe garage, appliances galore, any amount of food in the fridge, not to mentionthe economic infrastructure that makes it a convenient and comfortable place tolive.
The claim on the world’s resources would be huge. What we areseeing in commodity markets is the start of that claim, as China, et al, purchasethe raw materials to make the fridges, TV’s, buildings, pizzas and curries manymore of their citizens can now afford. Already China’s citizens consume roughly75% as much meat per capita as Europeans, or around half what the averageAmerican consumes.
South Korea, Taiwan and Singapore have achieved thiseconomic vault into the rich world within the past 30 years. There’s certainlyno reason why larger economies such as China and even Indonesia won’t do the same by the middle of this century.
The heart of this commodity boom is the economic revolutionin Asia. But the oil-rich countries are also experiencing rapid economic growth.The Russian economy, for instance, is also growing at 8% pa on the back ofgushing oil and gas revenues. At least some of that money is being spent on foodand materials – they can now afford to buy our high-priced butter!
There are a range of other factors that have been pushingcommodity prices higher including: drought, natural disasters; demand forbio-fuels; the higher cost of agricultural inputs; low stocks. But these are passingevents compared with the driving force of more people with higher incomes. ForNew Zealand the opportunity is huge given our ability to produce high qualityfood and the proximity of populous countries with plenty of potential for fasteconomic growth.