The Investigation of Commodity Price Volatility
No.: PR2234
Author: Chen, Shin-Hui
Price: Not for Sale
Publication: 2020.12
Abstract:
In Taiwan, the majority of locally consumed commodities are not locally produced but imported. The increase in costs of imported commodities, the imported inflation, usually gives rise to the daily necessaries. If a business isn’t able to absorb the extra costs it will have to pass them on to consumers, which will of course create inflation in domestic commodity prices. This is well known as the delayed pass-through effect. Too rapid inflation is negative to the economic decision-making process and slows economic growth. Thus, accessing the price trend in commodities and taking all response measures in the early stage are critical to maintain the price stability. Price stability and moderate inflation contribute to achieving high levels of economic activity and employment. This report is motivated to improve the transparency of the price mechanism and can be divided into two parts. One is that the data on primary commodity prices are updated twice monthly. We use the commodity data to visualize and chart the prices of commodities from seven commodity asset classes: energy, agriculture, basic metal, industrial raw materials, petrochemical raw materials, petroleum products and cements. This can help the government prevent an arbitrary redistribution of wealth and income as a result of unexpected inflation. The other part is that a comprehensive database of distributors- specific daily necessities price indices for 138 necessary items is built. The price data of 138 necessary items sold in three types of retailers, the convenience stores, supermarkets and hypermarkets, are reported by the price surveying technician. We provide distributors-specific indices for the 138 necessary items by equally weighting the sell price of respective convenience stores, supermarkets or hypermarkets twice monthly. We also discuss the dynamics of commodity price, key macroeconomic events and their influence on these 138 necessary items. By examining and charting these indices allows the government to recognize changes in relative prices (i.e. prices between different goods), without being confused by changes in the overall CPI price level. This comprehensive database also helps the government and the enterprise make well-informed consumption and investment decisions and to allocate resources more efficiently. Summary of commodities price dynamics are as follows. First, during the first quarter of 2020, Europe and United States faced a sharp decline in crude oil demand due to the outbreak of COVID-19. Not until April did The Organization of Petroleum Exporting Countries (OPEC) and its allies make an agreement to lower their current crude oil production. With this oversupply, the price of crude oil price collapsed in the early 2020.
Furthermore, Brazil, the world top sugar exporter, suffered by the port jam in May, which caused the shortage of sugar supply and boosted the sugar price. Meanwhile, China made a bulk purchase of soybeans and corn, hence the market price of both experienced significant increase. The global lockdowns and travel restrictions reduced the demand of raw materials in the global markets. Therefore the mental and steel prices falled dramatically in the second quarter of the year. As the epidemic has been ebbing, countries have decided to unlock their economies and returnd back to work since the third quarter of 2020. Following the lifting lockdowns, a series of surge in price of commdoities can be observed. According to the DGBAS’s (The Directorate-General of Budget, Accounting and Statistics, Executive Yuan) latest statistics, the CPI in Octobor 2020 increased merely 0.36% from September, and went down 0.24% over Octobor 2019. While the WPI decreased 0.35% from the preceding month, and went down 7.37 % compared with the same month of 2019.
In the first half of 2020, prices of eggs increased around 12 to 22 percent compared to the same period in the previous year. Hens tend to not lay eggs when the temperature dropped dramatically at night and resulted in the lower supply of eggs in the early 2019. Moreover, the Lunar year effect in 2019 raised the demand of eggs. In this short supply, the wholesales egg price hit the 20-year-high. In the beginning of 2020, the Avian Influenza happened in Yunlin and Changhua, which increased in the egg prices.
The COVID-19 happened in the Chinese New Year led the interruption of operation in some industries. Enterprises stuggled to prevent disruption in the cash flow and decreased their sell price. Thus, high variation is not observed in the price of 138 necessary items in 2020.
The plan of this report is as follows. We briefly overview the situation of global economy, financial markets and international events related to the inflation and commodity prices in Section 2. Section 3 and section 4 document the price variability of commodities and daily necessities, respectively. Section 5 is the outlook of 2020. The section 6 presents the literatures documented in this report. The Appendix reported the raw data and the analysis of special events that led to the price fluctuation in 2019.