Oil and food prices are expected to ease only moderately in the coming months, says an article in IMF Survey Online on July 1 by Thomas Helbling, IMF Research Department. But, food prices could respond more quickly than oil prices, the study opines. Wheat prices, for example, have declined by some 30 per cent from their peak in March 2008 on expectations of a better harvest this year, but corn and soybean prices have stayed high because of harvest concerns. Provided that appropriate policy incentives are in place, food prices should ease more substantially in the medium term.
Since early 2003, when global growth started to recover definitively from the 2001 downturn, oil prices have quadrupled; metals prices have tripled; and food prices have doubled. The very strong, commodity-intensive growth in emerging and developing economies has been an important factor behind these price increases.

Oil factor
The low level of spare capacity from the onset of the global recovery has been a key force behind rising oil prices. Oil demand in many countries appears to have responded less to world market prices over time because the extent of pass-through of changes in these prices to domestic prices has decreased. On the other hand, the supply response to higher prices has been sluggish because of shortages of equipment and labor, greater geological and technological constraints, and uncertainty about policy regimes affecting oil investment. This has led to the perpetuation of very low spare capacity and tight market conditions.
The issue of whether the increasingly prominent role of oil and other commodities as an asset class has had an effect on commodity prices remains controversial. For the oil market, the following points are particularly relevant:
u First, while data on oil inventories are not timely and lack global coverage, there is no compelling evidence to suggest that the sharp increase in oil prices in recent months has led to sustained, significant oil inventory accumulation.
u Second, the shape of the oil price futures curve does not suggest expectations of ever-increasing prices, as longer-dated futures prices have typically been below those of near-term contracts since mid-2007.
u Third, the direction of changes in investment flows into oil financial markets has not always been
consistent with the direction of price changes over the past year or so. For example, over the past month, data suggest that noncommercial futures traders have reduced their oil market exposure. Nevertheless, the IMF has proposed to prepare an analysis of the real and financial factors behind the recent surge in oil and commodity prices.

Food factor
The food price surge since 2006 reflects a confluence of factors. Demand growth has generally outstripped supply growth for many food commodities over the past 10 years or so, particularly for edible oils and major grains-including corn, rice, soybeans, and wheat. Unfavourable weather conditions in a number of countries led to reduced crop production in 2006-07, particularly wheat. The demand for corn increased sharply as a result of the sharp increase in corn-based ethanol production. Also, a growing number of countries have imposed export restrictions in response to rising food prices, which added to international price pressures.
(For details, see www.imf.org/external/pubs/ft/survey/so/2008/res070108a.htm