Commodit y Special Feature  Market Developments and the Power of Prices

Commodity Special
Special
Feature:
Feature
Market
Title:Developments
Special Feature
andHead
the Power of Prices
Primary commodity prices declined slightly between Figure 1.SF.1. Commodity Market Developments
August 2023 and February 2024, driven by a decrease
in oil prices. Supply growth in the Americas surprised 400 1. Commodity Prices1
(Index, 2016 = 100, US CPI adjusted)
on the upside, buffering the impact of geopolitical All commodities
300
tensions in the Middle East. Food and beverage prices Base metals
Food
increased, driven by the impact of El Niño on tropi- 200 Energy
cal crops. Iron ore prices rebounded due to record steel
production in China. Gold prices were supported by 100
safe haven demand. This Special Feature analyzes price
0
elasticities of commodity demand and supply in depth. 2015 16 17 18 19 20 21 22 23 24 25

120 2. Brent Crude Oil Price Forecasts2

Commodity Market Developments (US dollars a barrel; expiration dates on x-axis)
October 2022 WEO
Oil prices decreased despite Middle East tensions. After 100 April 2023 WEO
breaking $95 a barrel in late September, oil prices October 2023 WEO
April 2024 WEO
decreased by 4.2 percent between August 2023 and 80
February 2024, when they stood at a monthly average
of $80.70. On the demand side, weaker expectations
60
about global demand growth have contributed to 2023 24 25 26 27 28 29
downward price pressures. On the supply side, the
implementation of output curbs by OPEC+ (Orga- 8 3. Oil Supply Changes in OPEC+ and Non-OPEC+ Countries3
(Million barrels a day)
nization of the Petroleum Exporting Countries plus 1.5
4
selected nonmember countries, including Russia) was 2.3 2.4 1.6
0.3
more than offset by strong output growth in Iran and 0
0.0
1.2 3.1 –0.4 0.1
non-OPEC countries, led by the United States, Brazil,
–1.9
and Guyana (Figure 1.SF.1, panel 3). –4
–6.6 OPEC+ Non-OPEC+
Red Sea tensions have led to a 50 percent rise in
global freight rates of oil product tankers. Among –8
2019 20 21 22 23 24
the main routes affected is the one from the Middle
East to Europe (Figure 1SF.1, panel 4), for which 110 4. Responses of Clean Tanker Rates to Red Sea Tensions4
(Index, Jan. 2023 = 100)
prices increased by 200 percent from mid-November
2023 to mid-March 2024. The higher costs and the Baltic Clean Tanker Index
100
Middle East Gulf to UK
implied rerouting have only had a minor impact on
crude oil prices. Russian oil, primarily exported to
90
China and India, was mostly above the Group of
Seven price cap since the second half of 2023, at a
$15–$20 discount (based on Argus data). 80
Jan. Mar. Jun. Sep. Dec. Feb.
Futures markets suggest that oil prices will slide 2023 23 23 23 23 24
by 2.5 percent year over year to average $78.60 per
Sources: Bloomberg, L.P.; Haver Analytics; IMF, Primary Commodity Price System;
barrel in 2024 and will continue to fall to $67.50 International Energy Agency (IEA); Refinitiv Datastream; and IMF staff calculations.
in 2029. Risks to this price outlook are balanced. 1
Last actual consumer price index (CPI) value is applied to the forecast.
2
Upside price risks could arise from an escalation Forecasts are based on the World Economic Outlook (WEO).
3
OPEC+ represents the member countries of the Organization of the Petroleum
Exporting Countries plus some other oil-producing countries. Data are from the IEA.
4
The contributors of this Special Feature are Christian Bogmans, Lines represent logs of rates, which are normalized to January 2023. Shaded
Andrea Pescatori (Team Lead), Ervin Prifti, and Martin Stuermer, area represents the time since the first ship was seized by the Houthi rebels.
with research assistance from Wenchuan Dong, Joseph Moussa, and
Tianchu Qi. The consultant was Ivan Petrella. This Special Feature is
based on Bogmans and others (2024).

International Monetary Fund | April 2024 29

WORLD ECONOMIC OUTLOOK—Steady but Slow: Resilience amid Divergence

of the Middle East conflict and attacks on Russian Figure 1.SF.2. Volatility of Commodity Prices
oil infrastructure. Downside risks could arise from (Standard deviation of log differences)
a slowdown in Chinese oil demand and strong
0.25
non-OPEC supply growth, possibly coupled with
1990–2019 2020–23
a rise in OPEC+ oil supply to regain market share.
The outlook for demand growth is highly uncertain. 0.20

Natural gas prices continued to decline amid ample

supplies. Title Transfer Facility (TTF) trading hub 0.15
prices in Europe fell 24.4 percent from August 2023
to $8.10 a million British thermal units (MMBtu) in 0.10
February 2024—within the upper range of historical
prices. Mild weather, low industrial demand in Europe, 0.05
and ample liquefied natural gas (LNG) supplies have
led to high gas storage levels and lower prices (see
0.00
also Albrizio and others 2022, 2023). Asian prices for Base Iron ore Food Cereal Wheat Coal Natural Crude oil
LNG declined by 24.9 percent. US Henry Hub prices metals gas
decreased by 32.3 percent. Futures markets suggest
Sources: IMF Primary Commodity Price System; and IMF staff calculations.
that TTF prices will average $9.45 in 2024, decreasing Note: Volatility is the standard deviation of log differences in monthly prices over
to $8.73 in 2029. Henry Hub prices may rise from the respective periods. Base metals, food, cereal, coal, and natural gas are price
indices. The crude oil price refers to the IMF average petroleum spot price.
an average of $2.66 per MMBtu in 2024 to $3.63
in 2029, as US export capacity is expected to almost
double from 11.4 billion cubic feet a day (bcf/d) to
21.1 bcf/d until 2027, according to the US Energy of a novel leaf disease in Asia. Seafood prices surged
Information Administration. Risks around this outlook 25.9 percent as demand outstripped supply growth,
are balanced. partly because of stricter environmental legislation in
Metals prices rebounded. After declining during the some countries. Risks to the price outlook are bal-
summer, the IMF’s base metals price index rose by anced. Upside risks stem from further trade disruptions
4.7 percent from August 2023 to February 2024. Iron in the Black Sea and new food export restrictions.
ore prices increased by 14.9 percent due to record steel Larger-than-expected harvests constitute the most
production in China. Uranium prices rose by 75.3 per- important downside risk.
cent to their highest level since 2007 due to supply
disruptions from major producers, a potential ban on
Russian exports, and better prospects for nuclear power The Power of Prices: How Fast Do Commodity
production to combat climate change. Geopolitical Markets Adjust to Shocks?
tensions and expectations of monetary policy easing The pandemic, the war in Ukraine, and the
raised gold prices by 5.5 percent. conflict in Gaza and Israel generated shocks that led
Agricultural commodity prices rebounded. Between to a surge in commodity price volatility (Figure 1.
August 2023 and February 2024, the IMF’s food and SF.2). This volatility destabilized inflation, and made
beverages price index gained 6.0 percent, masking fiscal and monetary policy more difficult, especially
heterogeneity. Prices for cereals and vegetable oils for low-income and commodity-exporting countries.
continued to decline, by 7.2 percent and 10.9 percent, Geoeconomic fragmentation and climate change
respectively, on the back of abundant global supplies. could lead to more commodity market turbulences.
Concerns related to El Niño put upward pressure on The resulting price volatility could crucially hinge on
the prices of certain tropical crops, including cocoa the price elasticities of demand and supply. The lower
(64.2 percent) and coffee (18.2 percent). Coffee prices, those elasticities, the more prices react to unexpected
especially those for Robusta, experienced upward price changes in supply and demand (see Albrizio and others
pressure from tensions in the Red Sea, which led some 2022, 2023).
consumer countries to switch from Asian to Brazil- It is therefore essential to understand to what
ian imports. Rubber prices jumped 39.8 percent as extent commodity supply and demand are slow to
global output declined in 2023 following the outbreak react. Is demand more price sensitive than supply?

30 International Monetary Fund | April 2024

 Commodit y Special Feature  Market Developments and the Power of Prices

Figure 1.SF.3. Herfindahl Index by Commodity, 2021 Commodity Shocks

0.6 HHI production
The methodology uses idiosyncratic changes in
HHI consumption commodity production and consumption in individual
HHI production if all countries are equal countries to estimate average global price elasticities.
0.5
This works only if these shocks are large enough to
0.4 affect global prices, which, in turn, manifests as high
market concentration.
0.3 Most commodity markets are in fact highly con-
centrated in their production and consumption, as
0.2 elevated Herfindahl-Hirschman indices (HHIs) in
Figure 1.SF.3 show. For example, for palm oil the pro-
0.1
duction HHI is 0.4, roughly 80 times higher than the
value of the HHI if all 195 countries in the world had
0.0
the same market share (red line). This means that an
Bovine
Sugar
Crude oil
Wheat
Bananas
Cereal
Cotton
Rice
Coffee
Maize
Rubber
Copper
Cocoa
Soybeans
Coal
Zinc
Lead
Palm oil
Tea
Tin
idiosyncratic shock in palm oil production most likely
affects palm oil prices globally.
Sources: Bems and others 2023; Food and Agriculture Organization; International
Figure 1.SF.4 shows that these country-specific idio-
Energy Agency; International Historical Statistics; Stuermer 2017; World Bureau of syncratic shocks are a substantial driver of fluctuations
Metal Statistics; and IMF staff calculations. in global commodity production and consumption.
Note: For each commodity, the Herfindahl-Hirschman index (HHI) is calculated by
summing the squares of each country’s share in global production (consumption). Still, common factors are, on average, the stronger
The HHI ranges between indicating perfectly equal production across the 195 driver. One explanation is global supply chains. For
countries in our sample and 1 (indicating perfect inequality).
example, shocks to shipping can manifest as a com-
mon factor across countries on the supply side. In line
Do the quantities supplied and demanded adjust with this explanation, common factors have increased
more strongly over the long term? Are the elasticities particularly in their role in the output of industrial
different across energy, agricultural, and mineral com- commodities over the past decade. Common factors
modities? What policies make commodity supply and have also gained significance in the consumption of
demand more reactive? both food and industrial commodities (see also Jacks
This Special Feature presents a consistently identi- and Stuermer 2021). More synchronized global busi-
fied and estimated set of price elasticities of demand ness cycles may offer an explanation (de Soyres and
and supply for a broad range of commodities.1 Based Gaillard 2020).
on a granular instrumental variable approach (Gabaix For food commodities idiosyncratic shocks in
and Koijen, forthcoming), an annual cross-country production are bigger than those in consumption. This
data set on agricultural goods, energy, and metals from is not the case for industrial commodities. Agricul-
1960 to 2021 is employed.2 tural production can be affected more by idiosyncratic
country-specific shocks such as droughts, flooding, or
pests that can affect local yields.

1This feature is based on Bogmans and others (2024). It fills a gap

in the literature because surveys such as Dahl (2020) and Fally and Commodities Are Mostly Inelastic
Sayre (2018) mix estimates based on different methodologies. This In terms of supply elasticities, results show that
is a major pitfall when models include several commodities (see, for
example, Fally and Sayre 2018 and Bolhuis, Chen, and Kett 2023). metals, especially copper and zinc, tend to have the
The estimates are often based on correlations and suffer from biases lowest elasticities, while agricultural commodities have
(Roberts and Schlenker 2013). This feature also contributes to the the highest (see Figure 1.SF.5). For example, copper
literature estimating elasticities using vector autoregressive models
(see Kilian 2022, Baumeister and Hamilton 2022, and Kilian and
and zinc have a supply elasticity close to zero. In con-
Zhou 2023). trast, the results for cereals show a supply elasticity of
2Online Annex 1.1 provides data descriptions and the methodol-
about 0.6, implying that a 10 percent increase in prices
ogy. Data sources are World Bank (2024), IEA (2024), FAO (2023),
raises output by 6 percent within a year. This is in line
Bems and others (2023), and Schwerhoff and Stuermer (2020),
among others. The online annex is available at www​.imf​.org/​en/​ with the fact that crop switching, or the application
Publications/​WEO. of more fertilizer is possible within a year, whereas the

International Monetary Fund | April 2024 31

 WORLD ECONOMIC OUTLOOK—Steady but Slow: Resilience amid Divergence

Figure 1.SF.4. Common versus Idiosyncratic Factors in other commodities, more efficient use, and substitu-
Commodity Demand and Supply tion of other products for downstream products.
For agricultural goods, rice is atypical, showing
1970–2009 2010–21 a price elasticity of demand close to zero, probably
reflecting that only about 10 percent of output is inter-
0.20 1. Food Commodities
nationally traded. Rice prices are also typically subsi-
dized in Asia. Elasticities for tea, cotton, and wheat
0.15
are above 0.4. For crude oil and coal, the results show
demand elasticities below 0.2, in line with the diffi-
0.10
culties of switching fuels over the short term because
of technical constraints. Finally, copper and zinc have
0.05 demand elasticities close to zero, whereas those for lead
and tin are between 0.2 and 0.3. The former metals are
0.00 essential for electrical appliances and steel production,
Common Idiosyncratic Common Idiosyncratic
Consumption Production respectively. Lead and tin are easier to substitute.

0.20 2. Industrial Commodities

Supply and Demand Become More Responsive over Time
0.15 Commodity supply and demand become more
responsive over time as markets adjust to shocks
0.10 (Figure 1.SF.5). However, long-term multipliers show
notable differences across commodities at different
0.05 horizons. Results for most agricultural commodities
indicate that supply responses are flat over a five-year
0.00 horizon. Elasticities for perennial crops like coffee,
Common Idiosyncratic Common Idiosyncratic
Consumption Production cocoa, and rubber still show a statistically significant
strong peak about two to three years after a shock. For
Sources: Bems and others 2023; Food and Agriculture Organization; Stuermer most metals and energy, supply elasticities are upward
2017; World Bureau of Metal Statistics; and IMF staff calculations.
Note: The y-axis shows the standard deviation of the common and idiosyncratic sloping, but only the one for copper is statistically
components of the country-specific residuals. The residuals are obtained from significant. On the demand side, results are generally
panel regressions using countries’ commodity consumption or production as
dependent variables and time fixed effects as controls. Whiskers indicate the 10th not very precisely estimated. Metals show the largest
and 90th percentiles; the bars show the 25th and the 75th percentiles; black increases in the multipliers over longer horizons. At
markers indicate the median.
the same time, for most agricultural commodities, the
demand multipliers do not become larger.
expansion and opening of mines is subject to longer Demand and supply for agricultural goods seem
lead times. generally more responsive to shocks than those for
A distinction exists between perennial crops such as minerals and energy commodities. This is consistent
coffee, palm oil, and cocoa, on one hand, and annual with the smaller price volatility observed for agricul-
crops like soybeans on the other. Perennial crops are tural goods, compared with that for metals and energy
characterized by smaller short-term supply elasticities commodities (Figure 1.SF.2). Agricultural commodities
compared with those for annual crops. It takes an also see the least increase in their responsiveness after a
extended period for new trees to produce fruit: typically, couple of years, whereas mineral commodities become
two years for palm oil and five years for cocoa. The more responsive.
supply elasticities of energy commodities tend to be
between those for mineral and agricultural commodities.
Elasticities on the demand side are determined less Conclusions and Policy Implications
by commodity groups. Instead, commodity-specific This Special Feature estimated a broad set of supply
characteristics seem to play a larger role. This is in line and demand elasticities for commodities based on a
with several mechanisms that allow for demand-side consistent identification methodology and a unique
adjustment across all commodities: substitution by data set. The results show that commodity demand

32 International Monetary Fund | April 2024

 Commodit y Special Feature Market Developments and the Power of Prices

Figure 1.SF.5. Cumulative Supply and Demand Responses to a 1 Percent Price Increase
(Percent)

1. Food and Beverages

Bananas Bovine Cocoa Coffee
1.0 1.0 1.0 1.0

0.5 0.5 0.5 0.5

0.0 0.0 0.0 0.0

–0.5 –0.5 –0.5 –0.5

–1.0 –1.0 –1.0 –1.0

0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5

Maize Palm Oil Rice Soybeans

1.0 1.0 1.0 1.0

0.5 0.5 0.5 0.5

0.0 0.0 0.0 0.0

–0.5 –0.5 –0.5 –0.5

–1.0 –1.0 –1.0 –1.0

0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5

Sugar Tea Wheat Cereals

1.0 1.0 1.0 1.0

0.5 0.5 0.5 0.5

0.0 0.0 0.0 0.0

–0.5 –0.5 –0.5 –0.5

–1.0 –1.0 –1.0 –1.0

0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5

2. Metals
Copper Lead Tin Zinc
1.0 1.0 1.0 1.0

0.5 0.5 0.5 0.5

0.0 0.0 0.0 0.0

–0.5 –0.5 –0.5 –0.5

–1.0 –1.0 –1.0 –1.0

0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5

3. Raw Agriculture and Energy

Cotton Rubber Crude Oil Coal
1.0 1.0 1.0 1.0

0.5 0.5 0.5 0.5

0.0 0.0 0.0 0.0

–0.5 –0.5 –0.5 –0.5

–1.0 –1.0 –1.0 –1.0

0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 0 1 2 3 4 5

Sources: Food and Agriculture Organization; World Bureau of Metal Statistics; and IMF staff calculations.
Note: Impulse response functions (IRFs) show the change in the quantity supplied (blue line) or demanded (red line) as a result of a 1 percent increase in prices as a
function of time measured in years. IRFs are based on a combination of local projections and the granular instrumental variable approach (Gabaix and Koijen,
forthcoming). Figure shows 90 percent confidence intervals.

International Monetary Fund | April 2024 33

WORLD ECONOMIC OUTLOOK—Steady but Slow: Resilience amid Divergence

and supply are generally price inelastic, but that differ- build fiscal buffers and monetary policy space to
ences exist. The supply of agricultural perennial crops prepare for the larger impact of possible shocks. As
is more inelastic than that of annual crops. This may elasticities ultimately reflect adjustments made by
explain why wheat prices, which spiked at the start final consumers and producers, replacing energy and
of the war in Ukraine, have now come down below agricultural subsidies with targeted transfers would
prewar levels. Demand elasticities may have also played help increase the demand and supply elasticities of
a role, since within cereals, cross-elasticities of demand many commodities and could reduce their price vol-
allow for substitution. Supply and demand of min- atility. International trade can also play a prominent
eral commodities are particularly inelastic. Those for role in smoothing out commodity shocks and buffer
energy commodities are between those for agricultural against their economic impact (see Albrizio and
commodities and those for metals. At the same time, others 2022, 2023; and Alvarez and others 2023).
supply and demand become more elastic for mineral This will be even more relevant in the context of
and energy commodities over time. increasing geopolitical tensions and trade fragmenta-
Countries exposed to commodity markets with tion as well as in the case of critical minerals for the
relatively low elasticities, especially metals, could energy transition.

34 International Monetary Fund | April 2024