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Are Current Commodity Prices as High as Compared with Previous Years?

by: Arie Goren August 18, 2008 | about stocks: DBC / GSG    

Arie Goren

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There was a lot of talk this year about the dramatic rise of the price of food, which caused strong protests, demonstrations and even strikes around the world, and about the surge in oil price, which in turn caused a significant change in the behavior of users all over the world. The demand for high fuel consuming vehicles has fallen sharply, and there was a strong demand in the US for hybrid vehicles which are less fuel consuming. Late statistics show that people drive less now. But are current commodity prices high in the long term historical perspective, especially after the significant correction that took place during the last six weeks?

In order to compare current commodity prices to their historical values, the influence of inflation on the value of the dollar should be taken into account. For example, the current value of the dollar, inflation-adjusted, is 3.3 times less than its value 30 years ago, and also the average nominal household income today is by far higher than its value 30 years ago.

In the table below, the inflation-adjusted all time high real price of 20 main commodities is compared to the current price and the percent of decline in real terms is calculated.

The data presented in the table above show that in real terms, commodity prices were much higher in the past, especially during the years 1973-1974 after the Arab-Israeli war, when OPEC countries imposed oil embargo on Western nations, and during the years 1977-1980, the last period of the Jimmy Carter presidency in the United States, a period of very high inflation and two important negative global developments: the Islamic revolution in Iran on February 1979 and the Soviet Union invasion of Afghanistan on December of the same year. It is interesting to note that only energy, nickel and lead peak prices are from the last years.

In summary, commodity prices in real terms have been much higher in the past, but they were also significantly lower than today for years, especially in the nineties, as it is shown in the chart below, which is the Reuters CRB commodity index adjusted for inflation.

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This article has 3 comments:

  •  
    Aug 18 08:08 PM
    I love numbers, you can do just about anything you want with them. Take the highest-high, multiply by inflation and compare it to current price. I don't think that approach really tells us if commodities are fairly valued today. Maybe the average of the inflation adjusted yearly averages compared to the current year average would be more accurate.
    Reply
  •  
    Aug 19 03:04 PM
    Just to see how what I suggested might look, I pulled some data from inflation.com. They have a table of the average annual oil prices adjusted for inflation through 2007.
    The average of 30 years of inflation adjusted oil prices from 1978 through 2007 was $42.70/bbl. The 2008 average was $98.66, so our current price is >100% higher than the 30 year inflation adusted average. That's quite a little bit different from taking the highest high.
    Reply
  •  
    Nov 28 06:32 PM
    My friend Arie Gorens switched from the Ceramic business (Balgres) to the Financial world. Congratulations.
    Rafael Canelon
    rcanelon@shaw.ca
    Reply
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