Capital Press | Report: Investors pulling money from commodities

After a decade of blistering growth, global commodity prices have generally been declining since 2012, and the financial sector has begun withdrawing its sizable investments from commodities markets, according to a new economic report by Washington, D.C.,-based Worldwatch Institute.

However, the independent research organization’s report finds agricultural goods have fared better than most other commodity classes.

Though commodities traded on public exchanges saw a combined 6 percent decrease in prices during 2012, agriculture — helped by limited supplies due to a severe drought — energy and precious metals were the exceptions, making price gains, according to the report.

“If the drought hadn’t hit, I think agricultural prices would have been maintained or in line with other commodities and dropped a little bit,” Konold said, acknowledging population growth and increasing variability in weather could help buffer agriculture from future sharp declines.

Prior to 2002, Konold explained, commodities were demanded primarily by developed nations, and prices were in a gradual decline. Konold said that’s when developing economies in countries such as China, Brazil and Russia began entering the fray, with insufficient capital expenditures in equipment and production capacity constraining supply.

Commodity prices surged by an average of 9.5 percent per year over the next decade and investment poured in, a phenomena the report describes as the Commodity Supercycle. The exception to the rapid growth was 2008-2009, when the start of the recession hurt prices of the major commodity classes, except precious metals.

Global investment in commodities, which totaled $10 billion at the start of the 2000s, increased to $460 billion by the end of 2012.

Konold believes demand for commodities cooled in 2012 because the largest developing nation, China, took steps to curb inflation after years of record-setting growth largely driven by a construction boom.

Furthermore, large investment banks that turned to commodities for safe harbor during the recession have begun pulling out their money to balance their portfolios as the economy has improved. This year, through the end of April, commodities lost $63 billion in investment.

“So far in 2013, we’re seeing a continued slow-down of commodity prices and a continued exodus of finance,” Konold said. “It will be interesting to watch if that reduction continues and at what pace. That will give us an idea of if it’s a full-on mass exodus or if prices will stable out, and this is the modern commodities market.”

University of Idaho Extension economist Paul Patterson noted the Chinese “can’t produce enough of their own food, so they’re still the majority player in agricultural commodities.”

Prices of major agricultural commodities are declining this year, and economists were predicting declines in 2012, prior to the drought. Rather than a broader trend, Patterson believes the fundamentals of supply and demand have affected agricultural prices.

Patterson agrees investment banks will continue pulling funding from agriculture and other commodity classes to invest in stocks and other options in an improving economy.

But he insists that’s not necessarily a bad trend, provided that the money is taken out gradually so the market has time to adjust. Patterson believes over-investment in commodities tended to drive “high prices higher and low prices lower,” and the volatility increased market risk.

Citigroup Sees ‘Death Bells’ for Commodities Supercycle in 2013

The commodities supercycle is probably ending this year as China’s economic growth slows and the nation focuses less on infrastructure and urbanization, Citigroup Inc. said.

This year will probably signal “death bells” for the supercycle, or a longer-than-average period of rising prices, Citigroup said in a report dated yesterday, reiterating similar calls made last month and in 2011. The Standard & Poor’s GSCI gauge of 24 raw materials is down 2.1 percent this year, after an almost fourfold advance since the end of 2001.

The rally in the past decade spurred new mines, wells and crop acreage. Economic growth in China, the biggest user of everything from copper to cotton to coal, slowed to 7.4 percent in the third quarter, from as much as 12 percent in 2010. Expansion will increase to 8.05 percent in the three months through September and remain at 8 percent until mid-2014, according to economist estimates compiled by Bloomberg.

Change is “ushering in a new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators such as equities or currencies,” Citibank said in the report. “The downward shift in China’s economic growth rate combined with the decline in the commodity intensity of growth have a permanent and profound impact on global markets.”

The drop in the S&P’s gauge of commodities this year compares with a 12 percent increase in the MSCI All-Country World Index of equities, which advanced to the highest since June 2008 as U.S. stocks reached a record. A Bank of America Corp. index shows Treasuries lost 0.4 percent this year.

Commodity Prices

Natural gas and cotton are the best performers in the S&P index this year, with gold and silver, which both entered a bear market in April, dropping the most. Commodities are down about 29 percent since July 2008, when the worst recession since World War II curbed demand. While China’s growth accelerated in 2009 through the start of 2010, it’s since slowed.

“China has reached a new phase, less focused on infrastructure and urbanization, both of which are highly commodity intensive,” Citigroup said. “Lower single-digit economic growth shifting to a greater emphasis on consumption rather than investment hits industrial metals, bulk commodities and to a lesser degree energy demand.”

Hedge funds held a net-long position, or bet on higher prices, of 588,482 contracts across 18 raw materials in the week to May 14, U.S. Commodity Futures Trading Commission data show. That’s about 33 percent below the five-year average.

Raw materials have been in a supercycle since 2001 and the average length of each phase since the late 1700s has been almost 21 years, Chris Watling, chief executive officer of London-based Longview Economics Ltd., said in October at a conference in London.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2

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