If you think of New York when you think of stocks, you likely also think of Chicago when you think of commodities.
For decades, U.S. farmers and commodity traders have considered Chicago the mecca of commodities’ markets. It’s home to the Chicago Mercantile Exchange and the Chicago Board of Trade, two of the world’s most prominent commodities’ exchanges.
Yet, in recent years, neither exchange can claim the top three spots for the most-actively traded commodity futures contracts. Those spots now go to China.
Cotton and white sugar futures – traded on the Zhengzhou Commodity Exchange, one of China’s three futures exchanges – were the most-heavily traded contracts in the world last year. The #3 spot went to rubber futures traded on the Shanghai Futures Exchange.
It’s safe to say, China’s road to the second largest economy in the world naturally winds through the commodities world. And as China’s pollution problem threatens the fine balance between industrialization-lead economic growth, climate change, and commodity price volatility, the country’s ascent is likely to prove a wild, volatile ride.
Here’s a chart I’ve shared with you before. It shows the average daily range (a proxy for volatility) of corn futures going back to 1962.
Secular shifts, in the early 1970s, then again in the mid-2000s, ratcheted up the average volatility in agricultural commodities. Take a look…
Climate change – that is changes in regional climate characteristics, including temperature, humidity, rainfall, wind, and severe weather events – is a likely factor.
And with China’s laser-like focus on economic growth, with little thought given to curbing the excessive carbon dioxide emissions that scientists have shown to cause weather perturbations, the only logical conclusion is to brace for higher volatility in commodity prices in the decades to come.
This will lead to dramatic price swings… both higher and lower.
Watch for global commodity markets to come into focus in the coming years. It’ll be the new game in town, I think.