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Commodity Booms and Busts

  • Colin A. Carter

    ()

    (Department of Agricultural and Resource Economics, University of California, Davis, California 95616
    Giannini Foundation of Agricultural Economics, University of California)

  • Gordon C. Rausser

    ()

    (Giannini Foundation of Agricultural Economics, University of California
    Department of Agricultural and Resource Economics, University of California, Berkeley, California 94720)

  • Aaron Smith

    ()

    (Department of Agricultural and Resource Economics, University of California, Davis, California 95616
    Giannini Foundation of Agricultural Economics, University of California)

Periodically, the global economy experiences great commodity booms and busts, characterized by a broad and sharp comovement of commodity prices. There have been two such episodes since the Korean War. The first event peaked in 1974 and the second in 2008, 34 years apart. Both created major economic and political shocks, including fallen governments and human suffering due to high food prices. Each occurrence raised serious concerns over food and energy security and led to more government intervention in the commodity markets. Although there is no simple explanation for what causes such complex events, they do share similar characteristics. We find at the core of these cycles a set of contemporaneous supply and demand surprises that coincided with low inventories and that were magnified by macroeconomic shocks and policy responses. In the next few decades, the world faces the prospect of continued increases in the demand for commodities and greater uncertainty about supply. However, because market participants are likely to respond by increasing inventory holdings and investing in new technologies, we see no reason to expect an increase in the frequency of dramatic commodity booms and busts.

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Article provided by Annual Reviews in its journal Annual Review of Resource Economics.

Volume (Year): 3 (2011)
Issue (Month): 1 (October)
Pages: 87-118

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Handle: RePEc:anr:reseco:v:3:y:2011:p:87-118
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