World Commodity Prices:

In 2006 I tried to build a Self Storage facility. The estimated bids to construct the facility in the spring of 2005 was $2,100,000. By the summer of 2007 the price to build was $2,800,000. The self storage project died because at the new cost we would not hit break even for five years. Even then, the value of the facility would be only what we paid for it. The increase in cost was 33% over a eighteen month time frame. The cause for the increase in price was high commodity prices, and supply and demand for material and labor.

That got me to wondering what was happening to prices. The cause was a combination of a multitude of events all converging at once.

World wide demand for all maner of commodities, steel aluminum, gold, platinum, cement, wheat, corn, oil and so many more had increased in price over a short time frame. The world's economies are finally where catching up with the United States and Europe. As all of  these countries' GNP increased, their populations became avid consumers. Added to the rising comsumer demand, was demand from many very large construction projects that have been going on all over the world for some ten years now. Las Vegas, Macau and other world gambling destinations, had multiple, multi-billion dollar casinos and condominiums construction projects going on all at the same time. China, in a very few years had spent 40 billion dollars on the 2008 Olympic venues. China's three gorges dam project has been using concrete and steel for ten years. China and India, two name just two highly populated counties had historically unprecedented growth the last ten years. Free trade at it's best.

The U.S. has had an unprecedented boom in housing, commercial real estate development, and in road construction. Mean while, most countries around the world where in various stages of their own boom times. The Iraq war and the many major Mideast construction projects added to the demand curve.

To all this we can add consumer demand for all maner of items, with the increase in demand caused by a uninterrupted fifteen year run of world wide prosperity. Plus several natural disasters including hurricane Katrina's New Orleans devastation, increased demand for construction supplies in an already tight supply chain. Commodities speculators stepped in and drove prices even higher.

Then the higher price for oil, caused demand increases in other commodities areas, and the spiraling price increases went up and up. For example; higher transportation cost is a big factor in the pricing of food, and we saw that played out in higher food prices around the world.

All of this was funded by world wide increases in the money supply. The increases in the worlds money supply over the past twenty five years caused little inflationary pressure because technology has greatly increased productivity world wide. For example; an undeveloped country without a good telephone communication system could leap frog twenty years of development time by adopting cell phones. All this demand eventually caused shortages, and prices began to rise at an ever faster pace.

Then it started down;

Higher prices encouraged companies to invest in more production of commodities of all types to fill the demand at the new higher prices. As the new supplies, and the conservation methods that high prices encourage began to come on line, demand was already slowing. The opposite of the demand convergence was taking shape world wide.

The 2008 summer Olympics came and went, the big casino and condo projects around the world, for the most part, were completed, or haulted, as is the case of a couple of them in Las Vegas.  China's three gorges dam is coming to it's long awaited completion. Highway construction slowed as the cost per mile went up 40%. Three years after Katrina the recovery billions is mostly spent. High prices of new construction has killed many a commercial construction project, as it did my self storage project. High food and oil prices did what high prices always do, make people conserve, and seek alternatives, and so the story goes around the world. The high prices slowed demand and prices started retreating as goods chased fewer buyers.

All of the converging events that accumulated to cause the run up in demand, and prices over the past five years have run their course, and we are now experiencing the rapid decent of commodity prices around the world.

We are merely getting back to a place called normal.

by Jim Glasgow esq,