Rise in UK inflation highlights WEF’s commodity price risk concerns

It is a risk that should be higher up the risk agenda, experts said at the reports launch. UK inflation rose to 3.7% in December, up unexpectedly high from the 3.3% figure for November. This has been driven by energy and food prices, as global oil prices near $100 a barrel and crop shortages around the world increase demand for food, experts say. According to figures from the UK’s Office for National Statistics between November and December of last year food prices saw a 1.6% increase, the largest ever rise in this period. The largest upward effects came from a wide range of products, most notably from vegetables, bread and cereals, milk, cheese and eggs. In the same period fuels and lubricants increased by 2.8%, the largest November to December rise since 1996.hideSpeaking at the launch of the WEF’s Global Risk 2011 report last week John Drzik, President and Chief Executive Officer at Oliver Wyman Group of Marsh & McLennan Companies warned that increases in commodity prices, along with increased volatility, will cause earnings volatility for businesses that will force commodity price risk management onto the CEO agenda. It will also fuel other serious risks such as civil unrest and heighten geo-political tensions. “And unfortunately, as yet, we do not have a coordinated global governance model to deal with the risk," he continued. "Better risk management and planning at local, regional and global levels is therefore needed." The food water-food-energy nexus, which includes commodity price and volatility risk, is one of three major risk clusters identified in the WEF report. “The central point that I make to you is that we see us entering a new age of commodity price volatility that will see food commodities, energy commodities metals and others affected. It is not just a phenomenon right now as spiking but rather a volatility that we see as sustained for several years. The horizon of this report is about ten years and we could certainly see the commodity price volatility for the next decade and that will have some serious consequences,” explained Mr Drzik. “Think about the risks that it will fuel,” he continued. “At country level food shortages and spikes in prices will lead to civil unrest and food riots leading potentially to unilateral government action as with Russia this summer putting an export ban on meat. These types of export restrictions or export tax have implications. They could heighten geo-political tensions on other issues as well,” One such reaction was seen in Algeria this month where rioting broke out after days of unrest over food price increases and unemployment. Whist a rise in UK inflation extremely unlikely to lead rioting, it is one concrete example of a how commodity price flux is affecting the global economy. “We do not have a coordinated global governance model yet to deal with food security on a global level. There needs to be more planning at local, regional and global level to address these nexus of risks,” warned Mr Drzik. There are two reasons for the increase in pricing and increased volatility¬–increased demand and disrupted supply. An increase in demand of 50% for food, 40% for energy and 30% for water is predicted by 2030, Mr Drzik explained. Each of these figures is even greater than the growth in population as the usage of each commodity per person is also on the rise. But more importantly from a volatility point of view we are going to see more disruptions on the supply side. This will be due to an increased number of extreme weather events as a result of changes in climate. “Think about the recent flooding in Queensland and how that has affected commodity prices. There was an immediate jump in the coal price of 30% that is being translated into increased costs for utilities for all of Asia so it has this ripple effect,” explained Mr Drzik. The report also expects financial speculators to look at commodities as an asset class in order to use as a hedge or speculative device, which will create even more price volatility. And it notes that the fiscal deficit faced by many governments will hamper investment in infrastructure that could potentially solve some supply side issues by increasing the efficiency by which these commodities are used. There are serious consequences for industry too, the report warns, as more and more businesses will face earnings volatility from raw material price volatility, price spikes and the increasing range of volatility. “This will move commodity price risk management onto the CEO agenda. We think it has been treated by many companies as a secondary but it will become more primary as CEOs see their company’s earnings are being thrown into higher fluctuations because of commodity prices. It is going to force companies to ask do they have the appetite to bear a commodity price risk or do they want to take a different direction with their business model,” explained Mr Drzik. “Further it will force companies to use these resources more efficiently whether its energy or water or food. So energy efficient buildings, water more efficiently in agriculture, supermarket using new inventory techniques to reduce waste. So looking at the risk management side is going to critical for them,” he concluded.

Rise in UK inflation highlights WEF’s commodity price risk concerns

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