Last Friday the World Bank released its quarterly commodities report. The report has a feature story about y2k and pre-rollover impact. It's quite interesting and (of course) ignored by mainstream media. The Australian did a story on it, but if you'd like to see the actual report you can download it for free (and view with Acrobat) at http://www.worldbank.org/prospects/gcmonline/index.htm.

(The link is located at the bottom of that URL.)

Meg Moss

-- Meg Moss (meg@giglobal.com), August 11, 1999

Answers

If you would like to see the World Bank Global Commodity Markets team continue to investigate the potential impact of Y2K technology problems and anticipations of Y2K on global commodity markets, please email them a little note thanking them for their initial effort, "Anticipating Y2K" and encouraging them to continue their analysis. It would be best if you keep your email short, and please do not mention black helicopters, nuclear threats, and/or Mad Max.

prospects@worldbank.org

The current feature in the July 1999 World Bank Global Commodity Markets, "Anticipating Y2K," can be read at http://w ww.worldbank.org/prospects/gcmonline/index.htm

Sincerely,
Stan Faryna

-- Stan Faryna (info@giglobal.com), August 11, 1999.

Stan,

You forgot to mention contrails, prophecy, earth changes, solar eclipses, comets, asteroids, and tinfoil hats.

I figure as long as I can tell the difference between the Y2k problem and everything else while at the same time keeping all those other things in proper context and perspective I'm Y2k ok : )

Thanks Meg.

Mike

================================================================

-- Michael Taylor (mtdesign3@aol.com), August 11, 1999.

But do make certain to tell them you saw the ad here and that you want your free box of Y2K Kompliant .45 caliber Hydro Shok hollowpoints.

Also tell them you would like to be entered into the contest to win the trip to rural Montanna for two in the former missle silo.

Good luck in the New Year.

-- Gordon (g_gecko_69@hotmail.com), August 11, 1999.

Thanks Meg!

I am going to see about posting on the forum.

-- Brian (imager@home.com), August 11, 1999.

I have been told that the prospects email address does not work. Therefore, I am providing an alternate email address to give positive feedback on the latest world bank report. It is as follows:

Pllido@worldbank.org

Sincerely, Stan Faryna

-- Stan Faryna (info@giglobal.com), August 11, 1999.

Here is the full text of the World Bank report.

*Pages 1--2 from backup* Anticipating Y2K Anticipation of Y2K disruptions may cause consumers to increase stocks of commodities. The supplies of most commodities are large enough to meet increased demand, but crude oil supplies are tightening and prices may rise. Transportation is a potential bottleneck.

SPECIAL FEATURE

GLOBAL COMMODITY MARKETS 8 The Y2K technology problem (the millennium bug) that is expected to cause havoc at the turn of the century is receiving widespread attention and predic-tions of major disruptions ? even global recession. The impact of computer and embedded chip failures po- tentially threatens simultaneous and multiple disrup- tions of services. The FAO warns that the millennium bug could prove to be one of the most dangerous pests threatening farmers, and that the whole of the food chain is vulnerable to the Y2K problem. 1 There have already been some unpleasant surprises in prepara-tions for Y2K such as the discharge of raw sewage into a Los Angeles city park during tests of computer and electronic systems (Washington Post), the loss of telephone service during Y2K testing in Canada (The Ottawa Citizen), and the shutdown of a nuclear reac- tor in Pennsylvania during testing (Newsbytes). As we near the turn of the century, concerns will undoubtedly increase and problems will multiply. Re-gardless of whether the disruptions to occur are large or small, the anticipation of Y2K will lead to changes in consumer and producer behavior that could have significant impacts on commodity markets. Anticipating a crisis In some respects, Y2K resembles other major events that could have catastrophic outcomes such as war or a natural disaster. When faced with such events, consumers (including retailers, wholesalers, and pro- cessors) stockpile essential items. Following the event, consumers either delay additional purchases until their stocks return to normal, or they consume their stocks during the period when they cannot purchase these items at reasonable prices. This leads to a cycle of economic activity. Before the event: i) the precautionary demand for certain items increases, ii) prices may rise in re- sponse to this demand and depending upon supplies of the items, iii) producers increase supplies in re- sponse to actual or anticipated increases in demand. If the event does not have a catastrophic outcome then consumers have higher demand prior to the event and lower demand following the event. If a catastrophic outcome does occur, then economic activity may be disrupted and prices may continue to rise. Y2K dif- fers in one important aspect ? it is global. Everyone will be affected.

Historical perspective The Gulf War provides a recent example of how commodity prices react to uncertainty. Following

Iraqs invasion of Kuwait in 1990, oil prices soared because of the loss of Kuwaiti and Iraqi exports, and fears of further losses from the Gulf. But, non-oil commodity prices rose a modest 3.9% through the end of September 1990 and then declined throughout the following months until the allied attack in mid-Janu- ary 1991. The impact on non-oil commodity prices was substantially less than on oil because there was less threat of supply disruptions. Food prices rose sharply in the 1970s ? wheat more than doubled and rice prices tripled ? between 1972 and 1974. This created food shortages and caused some countries to alter their grain importing and stocking patterns. For example, Japan and the Republic of Korea, which relied on imported wheat as an important food source, increased wheat stocks during and immediately following the period of high prices. France, which was a major wheat exporter, doubled its carryover stocks in 1974 despite a record production and strong global demand for exports.

Changes in demand and supply The size of Y2K-related demand increases de-pends on several factors: how much consumers stock- pile, how much speculators buy in anticipation of higher prices, how much governments increase pre- cautionary demands for basic staples, and how much industries increase their stocks of raw materials. In the past, demand for most commodities has not in-creased significantly in anticipation of a disruption of supplies. But, growing concerns about the global im-pact of Y2K risks may lead to unexpected increases in demand. Basic staples such as food and fuels are expected to see the greatest increases. Commodity producers may also alter their ac-tivities and increase production in anticipation of Y2K disruptions. As with consumers, they may take off-setting behavior following the event ? or adjust to the consequences of the event. If producers correctly an-ticipate increases and subsequent declines in demand, then demand and supply could remain in equilibrium and prices could remain largely unchanged. If producers incorrectly anticipate consumer responses, then we may see prices rise or fall. Not all producers can adjust quickly. Agricul-tural producers are limited by the seasonal nature of production. Metals and minerals producers and en-ergy producers can more easily increase production if they have excess capacity. Global stocks of most com-modities are large due to the past two years of weakened global demand and large production, and this will buffer most commodity prices from significant in- creases. The supplies of many food commodities will also be large because the Northern Hemisphere crop will be harvested in the fall. Impact on commodity prices Energy appears to be the most vulnerable com-modity to the Y2K bug because peak demand is in
winter, when stocks  built up over the spring and sum-mer& nbsp; are required to satisfy demand. While oil stocks are high at present, they are expected to fall dramati-cally in the second half of 1999 because of OPECs large cuts in production. Energy supplies are also vulnerable because oil production is the most technology intensive of major commodities. Embedded microchips used for produc- tion, transportation, refining, and distribution leave energy vulnerable to disruption. Oil producing countries strapped for cash, such as Russia and Nigeria, may face problems which they lack the resources to fix. Thus, stocks could build at every available point along the supply chain because of fears of computer glitches. During the Gulf War, there was an immediate loss of supplies from Iraq and Kuwait. Speculative demand bid futures prices up sharply. Saudi Arabia and other producers with spare production capacity raised output significantly, albeit with an initial delay, to meet demand and support the international coali-tion against Iraq. There was no attempt to exploit the situation and keep prices high. Although prices re-mained high up to the War in January 1991, they fell back to pre-crisis levels once the threat of additional supply losses were reduced. What is not clear, as we approach Y2K, is whether there will be a sufficient supply response should speculative demand and stockpiling put undue pressure on prices. Producers are recovering from a prolonged slump in oil prices, and may wish to sus-tain prices around $20/bbl. The risk of being too ac- commodating with its production is that they may raise output too much and prices may fall precipitously. Thus there is a risk that a necessary supply response

will be too little or too late, and that stocking and speculative demand because of Y2K will exert addi- tional upward pressure on prices. This at time when markets are already expected to tighten significantly.

Transportation bottlenecks may occur Transportation could become the bottleneck as we near Y2K. Since a large share of global commodities production is traded, a disruption in our capacity to transport commodities could lead to local shortages and surpluses. The transportation sector may face dis-ruptions because of computer failures at the end of the year, but even before then, it may face a demand surge which disrupts normal shipping patterns. If importers attempt to increase their stockpiles of goods before the end of 1999, this could overburden the trans-portation system. The rates for dry bulk ocean freight increased 14% in the second quarter and have risen 45% since the lows reached in January. The recent increases may be partly related to Y2K as well as the recovery in Asian economies. If demand increases and rates con- tinue to rise, this could have several impacts on commodities. First, adequate space may not be available to ship commodities, and countries which depend on imports of food, fuel, and raw materials may find that they cannot import as expected. Second, low- valued commodities may be crowded out by high-valued com- modities and manufactures. This could cause bulky commodities such as grains and tropical timber to be displaced by higher-valued cargo such as manufactures. This could lead to not only disruptions of normal shipping schedules but also to wide swings in prices as surpluses build in exporting countries and shortages develop in importing countries. Conclusions Y2K technology problems are expected to lead to increased demand as consumers stockpile essential commodities. Supplies of most commodities are adequate to accommodate such increases, but crude oil supplies are tight and prices could rise on Y2K fears. Transportation may become a constraint as exporters and importers try to ship before the end of the year. This could lead to surpluses in exporting countries and shortages in importing countries. Lower-valued bulk commodities may get squeezed out by higher- valued commodities and manufactures leaving trade disrupted. 1 News Highlights, Food and Agricultural Organization of the United Nations, The So-called Millenium Bug ? or Year 2000 (Y2K) problem, May 10, 1999.

-- Brian (imager@home.com), August 11, 1999.