'Bull run in commodities market will continue'

Commodity prices have been on a spectacular upward journey across global markets, impacting precious metals, base metals, energy complex and agri-commodities alike.

Gold has been trading at record highs, touching a recent high of almost $1033 level, whereas crude touched a high of $110. Agri-commodities such as soybeans and soy oil have also been trading at record highs.

Generally, it has been seen that commodity prices are driven higher by surging demand throughout the world. But the irony is that the latest surge comes amid concerns about a weaker global economy. At present, commodities prices are rising because the US interest rates are falling below the rate of inflation.

When real rates are negative, they provide an incentive for speculation in storable commodities. One of the biggest surprises of this year was how quickly the Federal Reserve lowered interest rates.

These revisions in expectations of Fed policy coincided quite precisely with the boom in commodity prices over that period. Last week's sell-off of commodities also coincided with the Fed's decision to cut rates by 75 basis points -- a big cut, no doubt, but not as much as the market had been expecting. Now, commodities are rebounding as expectations build for more cuts.

The value of dollar has been depreciating against major currencies such as Euro, Japanese Yen, the Chinese Yuan, Indian Rupee and British Pounds. This impacts the balance of payment, pushing it to negative zones, especially in developing and under developing countries.

They are unable to export more goods and services due to appreciation of domestic currency. The continuous appreciation of Indian Rupees around 15 per cent since beginning of the year 2006 due to strong domestic growth and rising income has helped drive an expansion of more import and less export of agricultural commodity.

Chinese demand is also seen as a factor in boosting commodity prices. Another major factor attributable to rising commodity prices is the sharp increase in crude prices which have increased by almost 100 per cent over last couple of years and touched a high of almost $110 recently.

As higher crude prices have an inflationary impact on global economy, it exerts an upward pressure on prices of other commodities. And finally, the other big reason for rising commodity prices is buying by funds that have started adding commodities to their portfolio.

High-income growth is one of the main factors that drive the higher consumption especially in developing and under-developing countries. Rising investment, surging demand and expanding trade prospects are the other key drivers of global economic growth. Due

to these factors, economic growth is expected to remain strong in countries like China, India, Brazil and India.

The relative significance and growth potential of agricultural and industrial sector resources play decisive roles in the world of agri and industrial commodities trade. It enhances the demand of higher food and articles like luxury goods, house, and durable goods with the help of income growth.

The consumption gradually increases accordingly.As far as the Indian story is concerned, farm growth is expected around 2.6 per cent in FY08 compared with GDP growth of an estimated 8.8 per cent.

After a lower growth in industrial production and below expectation performance of the infrastructure sectors, inflation data released on Friday showed that it had surged to a 59-week high, to come within touching distance of the 7 per cent mark, effectively dousing expectations of an interest rate cut by the Reserve Bank of India.

The spiralling inflationary tend, which was up nearly a full percentage point at 6.68 per cent during the latest reported week ended March 15, has given rise to speculation of a possible interest rate hike in the near future, despite signs of a slowdown in the economy.

The Indian government's measures to tame the rising commodity prices seem to have little impact, as prices of some of them such as chana, yellow peas, masoor, turmeric, refined soya oil and mustard oil have jumped more than 20 per cent in the last three months.

Other commodities such as sugar, wheat, maize and guarseed also followed the rising trend. Apart from the rising demand for the cooking medium, reduction in customs duties and freezing of the base prices for imports of all types of edible oils since July 2007 have tempted refiners and stockists to book for higher imports.

After lying low during last year, sugar prices seem to have gathered pace. There is a good demand for sugar in the international markets, where prices are appreciating after a hiatus. India has emerged as a big exporter after it toppled Brazil to become the largest producer of sugar.

World commodity prices have been rising substantially over the past few years and are expected to continue in coming years as long as the demand supply mismatch continues.

The US economic scenario, global economic outlook, coupled with the economic growth of China and India, will continue to determine the future direction of commodity prices. The bull run currently being witnessed in commodities markets worldwide is expected to continue as the Asian economies occupy their rightful place in world economy.

Courtesy: www.ndtvprofit.com