The world is under enormous inflationary pressure, with most economies' debt-to-GDP ratios at an all-time high. This is primarily due to the effects of Covid, the Russia-Ukraine war, supply chain bottlenecks, and the strong dollar, which has caused dollar denominated debts to rise.
Most frontier and emerging economies will see their trade balance widen as imports become more expensive while exports remain relatively low.
To afford imports and get sufficient dollar reserves, countries are applying one sneaky tactic that has the ripple effect of driving everything up. They are renegotiating their commodity export prices.
Tanzania, for example, required grain traders to obtain an export permit before shipping maize out in June. The Tanzanian government increased permit fees by 93 percent that month. Kenya continues to receive the same supply of maize, but the consumer bears the burden while Tanzania benefits more from the export.
The same pattern is occurring in many countries. According to investment research platform Ycharts, coal export prices in South Africa have increased by 78.93 percent since October of last year. South African coal exports to the EU increased by +582.7 percent from January to September 2022, amid Europe's energy crisis.
While the world is still under pressure from high crude oil prices, the oil producing and exporting (Opec) countries agreed to cut output by up to two million barrels per day to keep prices high and increase oil revenues.
In essence, these countries rely on oil revenue to supplement their budgets and maintain their dollar reserves.
Early this week, Apple hiked prices for a host of its products, including Apple Music and Apple TV+ subscriptions. When you think of technology as a commodity, then you realise that America’s corporations are also renegotiating by increasing prices.
In Kenya, revenues from coffee exports were up 62.58 percent year-over-year for the 11 months to August 2022. In this trend, the commodity producers earn more revenue from exports while the respective governments earn more taxes from the expanded exports.
One of the factors influencing the great commodity renegotiation is the aggressive monetary tightening by the US Federal Reserve that is driving dollar demand.
For instance, on January 1, 2021, the Japanese Yen was trading at 103 against the US dollar. Today, it is at 150.
There is a likelihood that these rising commodity costs will lead to even more inflation. With the Kenyan import cover reserves at a seven-year low, it is important that policy makers start renegotiating our commodity prices. This could be achieved structurally by incentivising value addition and manufacturing.
As for investors and companies dealing with commodities, you can lock in a commodity price by entering a long position on the commodity futures markets. This way, if the commodity rises in price in the near future, your futures position gains value and compensates for the higher price. On the other hand, if the commodity price falls in the near future, the loss on your futures position is compensated by the lower price in the commodity market.
As the global workplace becomes integrated digitally, labour, as a commodity, is being renegotiated. For instance, giants snap top talent by offering them better remuneration.
