by Michael Arbow, MBA
Partner, RSD Solutions Inc.
First year economic students need look no further to witness the basic world of supply and demand than in the world of cotton. With historic high prices of cotton recently reached due to 3 years of poor crops (fall in supply) and increased wealth in the emerging economies (increased demand) the expected follow through is happening namely farmers globally are planting more cotton. Assuming the weather co-operates the world store of cotton will soon start to increase – cotton commodity prices are already reflecting this possible reality. However, the story doesn’t end there. With world population growth – another 40 million in Asia alone over the next 4 years, wealth creation compliments of the US Federal Reserves quantitative easing the rate of increase in the demand for soft commodities (food) is outstripping productivity gains for the foreseeable future. The result: the shift to increased production will mean a decrease in production of another soft and with that the price of that soft will increase.
What does this mean in the risk world? For suppliers and users of soft commodities you are in for a wild and volatile ride and that is before natural disasters enter the picture. The world has entered a new period of price movements which are more inter-connected and caused by shifts in production from one commodity to another rather than just meeting demand through increased planted acreage. This, I believe will lead to greater price volatility and threaten the existence of firms not adapting through more sophisticated risk strategies. It is time to re-think the “normal”.
For more on the price of cotton follow the link to this Globe and Mail article:
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