This is what makes the recent rise in prices even more surprising. As the US Farm Bill 2002 makes clear, developed countries are by no means reducing the income support they provide to their farmers. World output and trade are now even more depressed than was the case in 2001 or earlier, implying that world demand for primary commodities would also be depressed. And agricultural prices continue to be determined by demand and supply factors. What, then, explains the recent buoyancy in prices?
 
Three factors, clearly, have a role to play in this. The first is the lagged effect of low prices on production, since direct income support has increasingly been decoupled from production decisions, even if not completely. The second is the spurred demand for agricultural commodities resulting from sharply reduced prices. The net result of this has been that the volume of stocks of individual commodities has tended to either stagnate or decline. This basic tendency has been worsened in the case of those commodities for which country-specific developments, such as drought or pest attacks, have reduced world supply even further. Such factors have been important in recent times. For example, according to the IMF's World Economic Outlook: 'Grain prices edged up during the first half of 2002, largely due to adverse weather conditions in the United States, Canada, and Australia and consequent declines in global stocks. In the near term, however, further price increases are limited by increased competition from other producers such as Argentina and Brazil, while the European Union may reinstate export subsidies. Vegetable oils and meals prices have shown a more pronounced recovery than other agricultural commodities, largely reflecting a reversal of extremely depressed levels in 2000–01. Palm and coconut oil prices have increased owing to small crops in major producer countries and reduced inventories; palm oil prices have also been affected by large purchases in India and Pakistan to guard against possible supply disruptions stemming from political conflict.'
 
The role played by these supply and demand adjustments to low prices can be seen from Table 1, which shows that in the case of many commodities, both output and stocks have tended to decline over the last two years. The basic reason for the paradoxical buoyancy of prices in a period of depressed economic conditions is to be found in these adjustments. That is, when low or high prices prevail for long enough, the cobweb-type behaviour expected in textbook analyses does in fact play a role, leading to the unusual price behaviour characteristic of recent months.
 
To these we need to add the influence of a third factor: the role of speculative holding of commodities that tends to increase in periods when stockmarkets are depressed. There is reason to believe that the collapse of stock markets in the wake of the busting of the tech boom and the revelations of accounting fraud aimed at boosting share prices have resulted in a flight to safety which has found liquidity increasing in commodity markets. Since this happened at a time when production and stock adjustments were in any case tending to raise prices, the sharp rise in the prices of some commodities may be the result of speculative influences.
 
Equity markets in the developed industrial countries were in free fall, with what the IMF describes as 'surprising synchronicity', between end-March and late-July 2002. Some degree of volatility since then has not helped investors recoup the huge losses they incurred in recent months. Those losses were the inevitable outcome of the winding-down of markets, once it became clear that earlier profit figures had been inflated to satisfy investors, that profit projections were unduly optimistic, and that the 'recovery' in the US during the first quarter of 2002 was not going to last. According to the IMF: 'In the face of increased risk and uncertainty, demand for government bonds and high-quality corporate paper has risen, which—together with expectations that monetary tightening will be postponed—has driven long-run interest rates down significantly. Spreads for riskier borrowers have risen, and risk appetite has also declined.' Moreover, investors are now increasingly worried that the dollar, which has thus far defied all laws of economic gravity and ruled high despite record trade and current account deficits in the US, may in fact weaken, necessitating a shift out of dollar-denominated financial assets. In this context, what has also perhaps occurred is a shift of investors from financial to real assets, especially commodities, based on preliminary indications that commodity markets will remain firm because of lower production levels and lower stocks. This too could be driving up commodity prices, even if in the short run.
 
The simultaneous operation of all these factors comprises a possible explanation for the unusual buoyancy of commodity prices. But since none of these factors implies any change in the fundamental determinants of agricultural commodity prices, which still work to depress those prices in the long run, the observed buoyancy will, in all probability, be shortlived.