Commodities’ fall has been “fast and furious”, says Pratima Desai on Reuters.com. The benchmark CRB index last week hit a six-year low, down from a record in the summer.
The fall in some base metals already rivals those seen in the Great Depression, says Barclays Capital, while agricultural commodities have also had a rough ride. Corn is at a two-year low, having dropped almost 60% from a record $8 a bushel in late June. Soybeans and wheat have fallen by around 50% and 65% respectively since the summer. The latter is down around 41% on this time last year; cotton has lost 22%.
The global flight from risk partly explains the sharp declines, but rising supplies – witness a record soybean crop in China and expectations of record wheat production this year – and fears over waning demand due to the global recession are also playing a part. For instance, meat demand “appears to be waning”, according to a report from UBS, which has in turn weighed on corn (mostly used for feed). American wheat export sales are 27% down on last year, says Jeff Wilson on Bloomberg.com.
Don’t expect a sustainable rally soon, says Barclays Capital: risk reduction remains the name of the game. But don’t rule out some surprise gains next year, says Deutsche Bank. Agricultural commodities have historically been able to rally during downturns thanks to the scope for sudden supply disruptions. Deutsche says the corn market is expected to remain tight, with the ratio of daily stocks to daily consumption close to 1974 lows. Morgan Stanley predicts a deficit in the sugar market over the next few years as supplies are falling. The credit squeeze is also hampering production. As Jim Rogers points out, the credit squeeze means “farmers cannot get loans for fertiliser now”.