The Investigation of Commodity Price Volatility


Author:Shin-Hui Chen




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: Commodities: In 2021, the prices of agricultural products are relatively strong due to weather concerns in some production regions and short-term supply tightening. In addition, the recovery of international crude oil price is also beneficial to soybean, corn and sugar prices. Base metals: In 2021, psychologically driven of consumption exceeded short-term supply during post-pandemic era, and the labor disputes of copper and aluminum led to production concerns, at the same time the demand of copper, nickel and other raw materials are boosted by the importance of clean energy transformation, and the two major copper producing countries Chile and Peru are facing changes in mining policy, coupled with vaccination helps consumer confidence to revive, and the impact on metal production due to power restrictions in mainland China, resulting in higher base metal prices. Crude: In 2021, with the rising vaccination rate, the coronavirus pandemic is brought under control. The crude demand increase because of the optimistic economic recovery prospective, the summer travel surging, and economic stimulus policies. At the same time, OPEC+ continued to implement production cuts, and rejected pleas for production hike from U.S. In addition to, the winter storm in Texas at the end of February and hurricane Ida on September also affected crude oil supply. The large crude oil inventory accumulated in the early stage was rapidly decreasing then led to sharply oil price surge.. However, the Delta and Omicron variant virus was an uncertainty factor of the market. Steel: Since China and other countries recovered from the epidemic make PMI rebound rapidly. Many countries successively introduced economic stimulus policies, which has led to a significant increase in steel demand. In addition, the China government restricted steel production that pushed up steel prices further. After the fourth quarter of 2021, the slowdown of economic recovery, decline in automobile production, and real estate recession in China turned steel prices down. According to the latest statistics of the DGBAS (Directorate-General of Budget, Accounting, and Statistics, Executive Yuan), the CPI in October 2021 increased merely 0.30% from the preceding month and rose 2.58% compared with the same month of 2020. At the same time, the WPI increased in October 1.77% from the previous month and rose 14.78% compared to October 2020. The average PPI in October increased 1.38% from a month earlier. In the first five months of 2021, the prices of eggs in supermarkets and hypermarkets gradually increased by approximately 10.01% and 16.81%, respectively, mainly due to a sharp increase in chicken feed. Besides, severe weather changes slightly decreased egg production. In addition, due to the third-level alert of the COVID pandemic that pushed the demand for eggs in supermarkets to increase by 30-40% and the logistics congestion, the egg price in supermarkets kept relatively high from May. However, the egg prices in supermarkets and hypermarkets have fallen back after August. In November 2021, the average prices of eggs were NTD 46.93 and NTD 45.91 at supermarkets and hypermarkets, respectively. Meanwhile, the price of eggs in convenience stores has remained stable at NTD 79 by November 2021. The prices of sugar in supermarkets and hypermarkets rapidly increased in the first half of 2021. The price of sugar in hypermarkets has risen by 11.56% by June, reaching the historical highs of NTD 37.25 and NTD 39.67 per kilogram in supermarkets and hypermarkets, respectively. However, the sugar price in hypermarkets has slightly declined since July. By November 2021, the average sugar prices were NTD 37.00 and NTD 36.33 in supermarkets and hypermarkets, respectively, while the price in convenience stores remained at NTD 34.25. Notably, international sugar prices have reached the highest in the past three years, mainly due to the decline in sugarcane supply affected by drought and frost in Brazil. Additionally, international raw materials such as crude oil prices and transportation costs might impact domestic sugar prices. Specifically, the crude oil price has soared to around USD 80 per barrel in November 2021, registered the highest since 2019. Flour price in hypermarkets has continued the growing trend in the first half of 2021. Eight among ten sample points have adjusted the price to NTD 69 per kilogram. The average price in this period was NTD 67.70. However, the flour price in hypermarkets has significantly increased to NTD 69.30 since September 2021. Three among ten sample points increased the price to NTD 70.00, exceeding the previous price of NTD 69.00. Although the average flour price slightly inched down to 69.10 in November, the remarkable increase in flour price in 2021 infers that observation of the flour price trend is needed. The average price of sunflower oil in hypermarkets has increased by 13.51% from April to July. Although the price has not risen since August, it remained relatively high at around NTD 185 to NTD 195 till November 2021. According to the DGBAS, the WPI rose 3.97% from June to October, and the annual change reached 14.78%. From the fourth quarter of 2021, domestic consumption has been revived, and there will be adjustments in the minimum wage and the civil servant salary effective next year. In addition, the rising prices of raw materials and global freight have added up the price. Therefore, the price adjustments have been observed in livelihood commodities, from cheap catering to high-end restaurants since the fourth quarter.