Tags: commodity | Prices | Mixed | Blessing

NYT: Economists Warn Low Commodity Prices Are Mixed Blessing

Thursday, 14 Jun 2012 11:30 AM

The EU crisis and slowing growth in China, India and the United States have pushed down a wide array of commodities in recent weeks, but economists warn these price declines could be a mixed blessing, The New York Times reports.

Recently prices have declined for items such as coffee beans, copper, cotton, and oats.

The U.S. cost of living probably fell in May for the first time in two years as fuel prices retreated, buttressing Federal Reserve projections that cheaper commodities will help reduce inflation, according to a report from economists obtained by Bloomberg.

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In theory, when commodity prices fall, manufacturers should be able to make and transport goods at lower costs. That should result in savings for consumers, who should then have more discretionary income.

However, when many manufacturers and retailers benefit from falling commodity prices they often are hesitant to pass along the savings.

Furthermore, it is important to look at why prices of commodities fall and the effect that it has.

The Times reports some economists warn that the commodities plunge largely reflects the growing weakness in the global economy.

Essentially, things are getting cheaper because less, not more, raw goods are being consumed.

More than anything else, the steep drop in prices reflects deepening worries about a global economic slowdown as Greece prepares for elections that could lead to its withdrawal from the euro currency union, with financial repercussions across Europe and beyond, the Times reports.

This fear and uncertainty have been accompanied by a drop in consumer demand in Europe. This is particularly pronounced in at-risk economies such as Spain and Italy.

“The world economy is in risk of a recession and on that possibility, commodity prices weaken,” Allen L. Sinai, chief global economist for consulting firm Decision Economics, told the Times. “It is very helpful to consumers because food, gasoline, heating oil and clothing should get cheaper but if a weaker economy costs the consumer his or her job, they don't have income to buy a shirt.”

Reuters reported that weakening oil and natural gas prices near decade lows are cutting into producers’ cash flows and lowering profits.

Declining prices can hit commodity producers hard. As a result, investments in these companies become less attractive during a time when interest rates and yields on popular bonds are also unproductive.

Then too, benefits from low commodity prices may only pave the way for the painful return to tight budgets.

Many analysts say commodities have sold off so steeply lately that they are bound to turn around soon and resume the bull market that was spurred by growing demand from emerging middle classes in China, India and the rest of the emerging world, the Times reports.

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