IMF Says Commodity Prices to Decrease on Slower Economic Growth

The International Monetary Fund forecast a decline in commodity prices in the second half of this year and in 2012 on bigger harvests of food crops and as slower economic growth weighs on demand for base metals.

The IMF’s index of non-fuel commodities is forecast to slip about 5.5 percent in the second half of 2011 on better harvests, while base-metal prices are expected to decline “modestly” in 2012 on improved supply, the IMF said in its World Economic Outlook report today.

The world economy will expand 4 percent this year and the next, the IMF said today, from June forecasts of 4.3 percent in 2011 and 4.5 percent in 2012. The Standard & Poor’s GSCI Index of commodity prices has dropped 16 percent from its April 8 high this year, and is up 1.7 percent from the end of December.

“Commodity prices already reflect a weaker near-term global growth outlook,” the IMF said. “For a growing number of commodities, upward pressure will likely also be contained by supply responses to higher prices.”

The IMF forecast is for commodity prices to be “broadly unchanged” this year, it said.

“In the near term, broad commodity price risks seem more balanced,” the fund said. “Downside risks to global growth have risen. On the upside, price spikes due to supply factors remain the main concern.”

Geopolitical Factors

Upside price risks are “most pertinent” for energy and food, the IMF said. For oil markets, geopolitical factors are an important part of supply-side risk, and declines in spare capacity mean “relatively small upward surprises” in demand for oil can trigger large price increases, the IMF said.

Low inventory levels for agricultural commodities mean any “significant” shocks can cause food-price spikes, according to the report. Demand growth for food remains strong, with no sign in a slowdown in “rapid increases” in emerging-market food consumption, driven by rising incomes and a dietary shift towards higher-protein food, the IMF said.

“Food markets remain precariously balanced,” the IMF said. “Inventory buffers are very low for some important crops, notably corn, and this will keep prices very sensitive to changes in the supply and demand outlook.”

Food prices are expected to decline “modestly” in 2012, assuming more normal weather conditions and stable energy prices, with supplies increasing in response to higher prices, the fund said.

“The balance of risk to food prices is still to the upside, however, and this is reflected in derivative market prices,” the IMF said. “A combination of low inventories, volatile weather and demand uncertainties related to China and biofuels raises the prospect of further price spikes over the next 12 to 18 months.”

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