There’s been a huge sell off in commodity prices and this sell off has been broad based. Commodity markets are under siege, similar to how Bowie Tupou was feeling in Saturday’s fight with Joseph Parker in Invercargill.

The Bloomberg Commodity Index, which includes 20 commodities such as oil, copper, corn and gold, fell over 10% in July touching a 13 year low and is now down 28% in the past twelve months. We are now at lower levels than we saw during the Global Financial Crisis. No commodities have been spared with the Brent Oil price down more than 18% in July to $52 a barrel, industrial metals such as copper down 9%, gold fell 7% and soft commodities joined the rout with wheat down 19%. Closer to home the NZX whole milk powder futures price plummeted over 30% in July alone.

Bloomberg Commodity Index Sector Weightings

 

It’s been nearly a perfect storm for commodity prices with weak demand and an oversupply in many commodities. Also the strong US dollar (USD) is having an impact as most commodities are priced in USD, so a strong USD makes these commodities more expensive to import and can lead to even less demand.

Another contributing factor to the weakness is the impact of the slowdown in China. China is pretty much the largest consumer of most commodities that are pumped or mined out of the ground and in 2015 Chinese economic growth is likely to grow the slowest in 25 years, which is having a knock on effect on commodity demand.

China has been key to commodity demand

 

The outlook for commodities is looking grim for the balance of 2015. It’s difficult to see acceleration in demand as Chinese commodity demand is peaking and their economy shifts away from its reliance on investment and infrastructure spending and pivots toward a more consumer led economy.

However, longer term I remain optimistic on the outlook for agricultural commodities and obviously this is very important to NZ being a major dairy and agricultural producer. A growing Chinese and Indian population together with rising incomes and higher living standards will lead to increased consumption of meat, dairy products and processed foods. This growing demand in Emerging Markets will require an increase in supply of agricultural commodities but supply is being constrained by a number of factors. The key factors include less available arable land as cities expand, more extreme weather events such as droughts and shortage of fresh water in the longer term.

But we must remember that the demand for all commodities is cyclical; there are up and down cycles. We are currently experiencing one of those down cycles.

 

Stephen Johnston

Senior Analyst

Disclaimer: This blog is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.