4 Commodities Affected By World Conflicts

By Brent Radcliffe | April 13, 2011 AAA
4 Commodities Affected By World Conflicts

Individuals and businesses need access to resources for the manufacture of new products and creation of new services, but they also need them in order to keep the status quo of production. But what happens when an economy loses access to what is needs? Not only will growth be limited, but scarcity of key items may actually result in an economic contraction.

TUTORIAL: Commodities

Wars and other armed conflicts can cut off a country's access to the materials it needs to function. They create uncertainty about the future availability of commodities, and the risk associated with reduced supply can have a significant impact on prices and demand. As commodities become increasingly scarce, both individuals and businesses will have to pay more to obtain the goods they need. Here are four commodities affected by world conflicts. (Does the amount of goods and services produced set the pace for economic growth? Find out more in Understanding Supply-Side Economics.)

1. Oil
In modern times, no commodity has drawn as much attention (and criticism) as oil has. Oil is an essential driver of many sectors of the economy, from transportation (gasoline), to farming (fertilizers) to manufacturing (plastics). Unlike some commodities, demand for oil is fairly inelastic.

On October 6, 1973, Egypt and Syria launched a surprise attack on Israel, starting the month-long Yom Kippur War. The United States, as an ally of Israel, provided supplies to the Israeli army within a week of the start of the war, helping turn the tide in favor of Israel. In response to this, members of OPEC enacted an oil embargo on October 16, both raising the price of a barrel of oil and steadily reducing the production of oil. Though the war ended on October 26, Arab producers continued to cut output and extended the embargo to countries other than the United States. By March 18, 1974, the embargo ended. (Learn more in What Determines Oil Prices?)

The effect of the embargo was far-reaching and drastic. The world price of oil increased rapidly, from approximately $3 per barrel to more than $12. In the United States, shortages of oil quickly appeared and several states put restrictions on the use of energy in an effort to ration what remained.

2. Cotton
By 1860, the United States was in the thick of the industrial revolution. Exports of goods increased from approximately $125 million in 1840 to over $350 million in 1860. In the South, production of cotton expanded as demand in Europe continued to rise and the value of cotton exports approached $200 million (more than half of all U.S. exports). American production of cotton reached nearly 3.8 million bales in 1860.

The Civil War, which began in 1861, drastically reshaped the economy of the United States and the world. Great Britain, which had been dependent on American cotton before the war, turned to India and Egypt for production when American supplies became disrupted. Despite this move, the British textile industry was severely damaged. Cotton prices jumped from $0.10 per pound in 1860 to $1.89 per pound in 1863. (Learn to play the commodities market in Cashing In On A Commodities Boom.)

When the Civil War ended in 1865, Europe once again turned to the United States for cotton. Demand for Egyptian cotton plummeted and the Egyptian economy was ruined, ultimately leading to the country's annexation in the late 19th century.

3. Cocoa
When one thinks of war, one typically doesn't think of the lowly cocoa bean. After all, chocolate, derived from the bean, is associated with happiness and not conflict. However, the bean is worth billions of dollars each year and is only produced in a few countries. Most suppliers are clustered around the equator, and the king of production is the Côte d'Ivoire.

On September 19, 2002, Côte d'Ivoire descended into civil war following years of political and economic instability. The timing of the civil war made things more difficult, as the harvest season typically starts in October and lasts through January. With more than one third of the world's supply of cocoa coming from the Côte d'Ivoire (another 20% comes from its neighbor, Ghana), prices reacted quickly to the threat. A pound of cocoa jumped from $0.95 (September 6, 2002) to $1.08 (October 11, 2002). After falling to the $0.80 range, volatility once again set in with a 6% jump between January 24, 2003 and January 31, 2003. (Learn the contract specifications for a few of the most heavily traded commodities, including coffee and cocoa. Check out Trading The Soft Commodity Markets.)

Prices didn't fall below $0.80 until May 2003, but by then some of the heaviest fighting was over. The civil war officially ended in 2007.

4. Wheat
From the outset of World War I, blockades of port facilities and the obstruction of trade created scarcities - especially of food. Britain, for example, relied heavily on trade to feed its population, as it only provided 20% of the wheat it consumed.

European purchases of American wheat pushed prices up rapidly. In order to slow inflation and ensure that there was enough supply for domestic consumption, the government began to set prices. In 1915, wheat averaged $0.98 per bushel. By 1917, when America entered the war, that price was guaranteed at $2 per bushel.

By war's end the pricing policy was becoming untenable, as farmers outside of the United States were selling wheat for far less. When government export assistance ended, prices for American wheat fell by 50%. This was primarily because high prices had led farmers to plant more wheat, with the supply far outstretching post-war demand.

TUTORIAL: Economics Basics: Demand and Supply

The Bottom Line
Some resources are common and available from a number of suppliers, meaning that world supply is less likely to be threatened outside of an extensive world-wide conflict. Investors reliant on resources that have few substitutes (if any) should watch headlines like hawks. The world can change quickly, and not always for the best.

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