The outbreak of Covid-19 has been accompanied by widespread decline in global commodity prices. The pandemic presents a unique shock that has a major impact on both demand and supply of commodities. Oil markets have been most affected given the travel restrictions arising from mitigation measures and have witnessed the steepest one month decline on record. Metal prices have also fallen, albeit less than oil, while agricultural prices have been much less affected so far given their indirect relationship with economic activity. Over the short-term, in addition to weaker demand, disruptions to supply chains could cause dislocations in commodity markets, with food security a key concern. The ultimate impact of pandemic will depend on its severity and duration, but it is likely to have lasting implications. Changing consumer behavior could cause a structural shift in work patterns, reducing travel and demand for fuel. An unwinding of complex global value chains may occur which could even reduce commodity demand.
Moreover, for agriculture, the upcoming growing season may be affected by shortages of available inputs resulting from mitigation measures. The labor force available for commodity production may be curtailed if vast number of people subject to movement restrictions including cross border. This is a great concern for agricultural production in advanced economies where there is heavy reliance on migrant workers who may no longer be able to travel. Currently global food markets are markedly less vulnerable than in 2007-08 with production and stocks of key food commodities near record high and prices unusually stable. Nevertheless, policy action by individual large countries could destabilize markets.
Over the last 70 years, there were four global recessions: 1975, 1982, 1991 and 2009. In each of these spells, there was a contraction in global annual per capita GDP and other key indicators of global economy. Regarding disruption, widespread travel disruptions bear some similarities to the ones after 9/11 terror attacks on the US. The attacks also resulted in sharp spike in uncertainty and contributed to global slowdown and recession in the US. Finally, there have been several instances of disease outbreaks: SARS in China in 2003; H1N1 (swine flu) in 2009 and Ebola in West Africa in 2014.
Pakistan’s marketing year (MY) 2020/21 cotton production is forecast at 6.3 million 480 lb. bales, down 100,000 bales from the revised 2019/20 estimate and 21% less than last year’s annual projection of 8 million bales. This projected lower production is due to a 12% decrease in area from the previous year. For domestic consumption, while Covid-19 significantly impacted all major cotton consuming countries like Pakistan, Bangladesh and India which are forecasted to have the second largest drop in consumption after China.
Recent announcements of trade restrictions by some key exporters have raised concerns about food security. It may result in hoarding if such concerns become widespread. Low income countries are more vulnerable to food insecurity. Production is also being affected by disruption to key inputs. Low availability of pesticides is already affecting crop protection efforts and will likely reduce yields next year. Lack of pesticides also hampered efforts to contain pest outbreaks including the current locust outbreak in Africa, Iran and Pakistan.
Gold prices have risen 8% since January 2020 but have fluctuated significantly as investor sentiments have evolved. Uncertainty and safe-haven flows have driven prices higher although declines were seen in March. Moreover, strengthened US economy and announcement of Covid-19 vaccines will further draw down the gold prices next year.
There has also been reduction in shipping activity as a result of shrinking of global trade. Oil prices have declined by two-third since January due to unprecedented combination of major demand and supply shocks. The shutdown of travel has resulted in a substantial fall in demand for transport fuel which accounts for two-third of global oil demand.