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History Suggests No Quick End to Rout in Commodity Markets

The commodities slump that spurred bear markets in everything from gold to corn to sugar this year will deepen by year end as prices head for their first annual loss since 2008, if history is any guide.
The Standard & Poor’s GSCI Spot Index of 24 raw materials has fallen during December 83 percent of the time since 1971 when the benchmark gauge was posting losses for the year through November, data compiled by Bloomberg show. The average December loss was 3.9 percent, which if it happened this time would mean a 7.8 percent drop for the year.

Investors pulled a record $34.1 billion from commodity funds since the end of December, according to EPFR Global, which started tracking the flows in 2000. Ample rains boosted global crops, increased mine output spurred supply gluts in metals and the U.S. is extracting the most crude oil since 1989. Economic growth in China, the biggest user of everything from soybeans to zinc to cotton, is poised to slow for a third year in 2013, according to economist estimates compiled by Bloomberg.

“It’s likely that the trend will hold through the end of the year,” said Michael Cuggino, who manages about $11 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco. “Investors see anemic or slowing economic growth in the world’s mature and emerging-market economies, while there’s more supply on hand. That translates to lower prices.”


2013 Losses

Fifteen members of the S&P GSCI are heading for annual losses, with grains and precious metals leading the declines. Corn tumbled 39 percent, on track for the biggest annual slump since the data begins in 1960. Gold is heading for the first yearly retreat since 2000 and silver is poised for the worst rout in three decades.

The commodity index fell 4.1 percent this year, while the MSCI All-Country World Index of equities jumped 18 percent. The Bloomberg U.S. Dollar Index, which tracks the currency against 10 major peers, gained 3.5 percent. This is the first time that commodities are trailing both shares and the dollar since 2005, when the data begins.

Since 1971, commodities fell in December 55 percent of the time, and averaged returns for that month of 0.1 percent. In the years when the GSCI is negative in the first 11 months, the December losses are magnified.

There will be “significant” declines through next year for iron ore, gold, soybeans and copper, Jeffrey Currie, Goldman Sachs Group Inc.’s head of commodities research in New York, said in Nov. 20 report. Raw materials diverged from equities as the supercycle, or longer-than-average period of rising prices, is eclipsed by more supply, Currie said in May. Citigroup Inc. and Credit Suisse Group AG are also bearish.

Goldman Outlook

Goldman Sachs forecast in October that its favored gauge, the S&P GSCI Enhanced Commodity Index, will be 0.7 percent lower in 12 months. Precious metals will lead the declines with a drop of 17 percent and agricultural products will fall 8.1 percent, the bank forecast.

Cocoa is this year’s best-performing commodity, with prices gaining 25 percent after dry weather hampered crops in West Africa, the top growing region. Supplies will fall short of demand for the next four years, Macquarie Group Ltd. estimates, citing the International Cocoa Organization. Natural gas prices climbed 18 percent this year, and feeder cattle rose 7.3 percent as ranchers recover from last year’s U.S. drought, the worst since the 1930s.

Industrial Metals

Signs of a rebound in global growth and gains in developing economies will support demand for raw materials, analysts at Societe Generale SA led by Michael Haigh, the head of commodities research in New York, said in a report Nov. 26. Investors have become “excessively pessimistic” on industrial metals because prices are below output costs for some producers, the bank said.

The world economy may expand 2.8 percent next year, the most since 2011, according to the economist estimates compiled by Bloomberg.

U.S. building permits rose in October to the highest since June 2008, Commerce Department figures released Nov. 26 showed. Four of five investors expect the Federal Reserve to delay a decision to taper stimulus until March or later, according to the latest Bloomberg Global Poll. The U.S. is the world’s biggest consumer of crude oil, and American builders put about 430 pounds (195 kilograms) of copper into the average home.

“There’s less fear about the global economy moving into 2014, and what that does is makes you more positive on commodity demand,” said Catherine Raw, the London-based manager of the BlackRock Commodity Strategies Fund. “The market outlook is one in which commodity prices are more stable and less likely to go down given that better demand environment.”

China Demand

The S&P GSCI more than tripled since the end of 1999, including 11 gains over the past 13 years, setting records in everything from oil to gold to copper. Producers struggled to keep up as China’s economy expanded more than fivefold. That attracted a surge of investment and commodity assets under management totaled $343 billion in September, from $160 billion in 2008, Barclays Plc estimates.

In China, a move away from infrastructure expansion may mean less demand for raw materials, Citigroup said in a report Nov. 18. Expansion in the Asian nation is slowing to 7.6 percent this year from 7.7 percent in 2012, according to the mean of 52 economist estimates compiled by Bloomberg. Growth is expected to slow to 7.5 percent next year and 7.2 percent in 2015.

Hedge Funds

Hedge funds and other money managers are holding a net-long position of 507,489 futures and options contracts across 18 U.S.-traded commodities, Commodity Futures Trading Commission data show. The wagers slumped 27 percent since the end of December and compare with a peak of 1.56 million contracts in October 2010. Speculators are net-short, or betting on price declines, for corn, copper, coffee, wheat, soybean oil, natural gas and ultra-low-sulfur diesel.

Gold is headed for its first annual decline in 13 years on mounting speculation that Fed policy makers will reduce the central bank’s $85 billion in monthly bond purchases. Prices fell 35 percent from a record $1,923.70 an ounce in September 2011 as some investors lost faith in precious metals as a store of value. Global holdings in exchange-traded products backed by gold tumbled 30 percent this year to the lowest since March 2010, erasing $67.5 billion from the value of the assets.

Bullion prices may drop to $1,045 by the end of next year, Goldman’s Currie said Nov. 20. Futures in New York settled at $1,250.40 on Nov. 29.

Copper Surplus

Stockpiles of copper monitored by bourses in London, Shanghai and New York rose 17 percent in the past year, according to data compiled by Bloomberg. Supply will outpace demand by 407,000 metric tons this quarter, compared with a 636,000-ton shortfall in the previous six months, according to Barclays. Next year’s surplus will total 193,000 tons, from a 63,000-ton deficit in 2013, the bank says.

Farmers in the U.S., the biggest corn grower, will harvest a record 13.989 billion bushels this year, the government estimates. Ninety-five percent of the U.S. harvest was complete as of Nov. 17. Hedge funds and other speculators have been net- short on the grain since July.

Global food costs tracked by the United Nations fell 14 percent from the all-time high reached in February 2011. The gauge dropped 3.9 percent this year, led by a 21 percent slump in cereal prices. Cash flows at Archer-Daniels-Midland Co., the world’s largest corn processor, “are benefiting from lower commodity prices,” Ray Young, chief financial officer of the Decatur-Illinois based company, said on an earnings conference call Oct. 29.

Sugar Glut

Sugar prices are heading for a third annual drop, with supplies exceeding demand by 4.73 million metric tons in the 12 months started Oct. 1, according to the London-based International Sugar Organization. Global soybean production will climb to an all-time high of 283.5 million tons, the U.S. Department of Agriculture forecasts. Record coffee crops from Brazil to Vietnam are compounding a global glut, expanding inventories to a five-year high, USDA data show.

J.M. Smucker Co. has seen “continued favorable impact” from lower commodity costs, and is passing along savings to customers via promotions, Chief Executive Officer Richard Smucker said in a conference call on Nov. 20. The company, based in Orrville, Ohio, makes Folgers coffee, the top-selling U.S. brand.

“Supply and demand imbalances have been really fueling huge stockpiles,” said Jack Ablin, the chief investment officer at BMO Private Bank in Chicago, who helps manage $66 billion of assets. “While we’re certainly looking for signals for an upturn in commodities, we’re not seeing many of them yet.”

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