Commodity Malaise continues…….

The last year has been difficult for the world economy, and it has affected all of us, and particularly our agricultural clients. What began as an oversupply in the Milk Sector quickly became apparent as one part of a sudden collapse in global commodity prices, in every sector, from oil to metals to food.

The causes have been varied. Opec has been trying to dislodge higher cost US Shale oil producers, but they may now be regretting this game because it has gone out of their control, and all producers are now maintaining or even increasing production on lower prices, just to maintain the “monthly cheque” at a level that can pay their public services. It’s desperate stuff, and it’s not even working, as we discover last month that Saudi Arabia and five other Gulf countries are introducing a form of VAT for the first time.

Second, the Chinese economy has gone from world darling to unreliable struggler, if you read the more hysterical part of the press, but whilst this is almost certainly over-exaggerated, the effect has been the same. It has cut the forward price of commodities, as Markets think China will be buying less, and that thought is enough to determine prices.

Third, world geo politics have been horrendously depressing – Syria/ ISIS, Russia/Ukraine, Iran/Iraq, Libya, refugees, boat people and migrants, an ineffectual EU, a rather isolationist inactive cool US President – and the psychological effect of all of this has depressed and worried the public who buy products and services, knocking demand and prices again.

Many governments are locked into commitments to fiscal austerity, that now look self defeating, and yet they fear that any change would undermine their own Sovereign credibility to raise the current amount of that deficit.

So, it’s bad, and it’s not going to change for a while. The world will come out of it, but as John Maynard Keynes once said, “the market can stay irrational longer than you can stay solvent”

In many ways, the dilemma of oil producing countries is very similar to our own agricultural clients. There is a key difference between commodity production and manufactured products. The latter are normally much more flexible, and manufacturers are able to reduce or cease production rapidly. Commodity producers, farmers, do not have that flexibility.

The only medium term economic solution is aggregate Growth. Politicians who have power to do something need to collectively find ways to stimulate Demand, and that should start with Infrastructure Projects. There is no shortage of dilapidated infrastructure in Cumbria and Yorkshire, following the recent floods. They can start here, and put Income, in return for work, into the hands of local businesses and farmers now. Why not?

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