KUALA LUMPUR: Price volatility will continue to dominate the scene as commodity cycles become shorter and spikes become more frequent and dramatic, said Rabobank Nederland’s executive board member Sipko Schat.

“We are moving now into a new era where spikes could be quite heavy, not only in commodities but also currencies or even in equities.

“In the past, you have the cycles of about seven years. But it is shorter now and can be quite dramatic,” he told The Edge Financial Daily in an interview recently.

Aided by growing demand, Schat said the shorter patterns of the commodity cycles would mean that spikes in commodity prices would occur more frequently making prices volatile.

Commodity prices rallied in the first half of this year, not long after the collapse of economies around the world at the end of last year, as investors shifted their money into commodities, which have once again become an asset class.

Strong demand from China, as its economy continued to grow amid the gloom and doom surrounding the globe, also lent strength to the prices rally.

Commodity prices have mostly tapered off since, but their shine has not totally vanished as demand is expected to grow with the economic recovery.

“I expect because of the underlying fundamentals, the prices will be going up. The increase that we have seen in end-2007 and early-2008, I think that might come back.

“There will be more volatility in commodity prices because the demand for commodities is growing bigger and bigger. There is a change in lifestyle, scarcity of resources and climate change, and the element of speculation. So, the spikes we have seen will return, probably not in 2010 but certainly in 2011.

“And it could be caused by rumours, or speculation or position or because of the fact that part of the liquidity is taken away. But I see more spikes, and from time to time, it can be dramatic and heavy,” he said.

Schat also said the dollar remained a big factor in commodity prices as evidenced by its close correlation to the greenback.

Last Friday, commodities rose as the dollar continued its decline. As at 6.45pm crude oil was up 52 cents to US$77.46 (RM261.04) and crude palm oil for February delivery added RM17 to RM2,289, while the dollar index shed 0.245 points to 75.448 points.

“A lot of prices are affected by the dollar and a weak dollar has created high commodity prices. When the risk appetite grows, then you see that the dollar falls but when the risk appetite goes down, the dollar appreciates,” he said.

Schat added that bad monsoons in India and heavy rains in Latin America had affected soft commodities. “Prices of coffee and orange have never been so high.”

“Also, for commodities, you see more speculation coming back. The hedge funds that were out of the markets for at least the last five to six months, some of them are back,” he added.

Schat said economic recovery would remain weak despite the encouraging economic indicators released from the US recently and most of the upside had been priced into the equity markets.

He said the stock markets, which has risen some 70% this year, was due for a correction as its growth had run ahead of time.

“Another reason recovery will be slow is because banks are still in a poor financial state. First, they had problems with their financial assets, then real economy hit them. Then they have to repay governmental support at a high price.

“The system is still not as stable. A lot of impairments have been taken but a lot more needs to be taken,” he said. However, he noted that a comforting fact was that governments would continue to step in should banks failed in another crisis.

Currently, Rabobank is the only triple AAA international commodity bank in the world. It provides all-finance services in the Netherlands as well as food and agriculture internationally.  

The rising prices of commodities have also raised concerns on impending inflation, to which Schat said may be a big problem going forward.

“Maybe not in 2010 but in 2011 and this is because of the massive liquidity and shortage of some commodities and capacity. So you see a lot of positioning for inflation hedge instruments, whether in index, homes or real estates,” he said.

All these speculation could potentially drive prices even further and create more bubbles.


This article appeared in The Edge Financial Daily, November 16, 2009.