Boom to Bust

Two weeks ago, this column suggested that the commodities boom might be over and noted indicators supporting that contention. What was a nebulous maybe two weeks ago looks a lot more solid today. Indeed, with regard to several critical items, the extent of the price falls has gone well beyond any normal ‘correction’ and looks suspiciously like a collapse. In the commodities market more than any other, nothing should ever be considered impossible, but that prices could run up again to the levels of a few weeks and months ago seems, at the least, very unlikely.

This is especially true of the grains. Let’s start with corn: two years ago, a bushel of corn fetched three bucks. One year ago the price was around four – and this was considered expensive and blamed on the biofuel lunacy which diverted corn from cows and people to making inefficient ethanol. But in the half-year from mid-October 2007 to mid-April 2008 the price rose steadily to around $6.20 a bushel. After resting for a few weeks the price blasted off again in June and touched $8 dollars in early July. That was the peak and, as usual, the other side of the hill has been even steeper than the way up. One month later, the price is around $5.30 – which is a spectacular collapse by any standards. 

Of course, corn is a weather market. The damage wrought by spring floods in the mid-west was a major factor in the final run-up, while the very positive growing weather in recent weeks has turned the tide – plus the fall in the price of oil and decline in demand for petrol in general. Hopefully, the writing is on the wall for corn-based ethanol, at least once the Bush regime is removed. But what happened to corn is far from being unique. Wheat has done much the same, but even quicker: its price zoomed from around $5.50 a bushel last summer through a series of ascending peaks, the last of which was $12.50 in mid-March. Then it collapsed, back to around $8 by June, where it has stabilized – at least temporarily. But soybeans beats them all: only $6 a bushel two years ago, the price went through $10 last November and then surged to successive records of $14+ in March and $16+ in July. The fall was even more dramatic and earlier this week the price was back to $12: if that doesn’t represent a spike, then it’s hard to imagine what might.

It looks, therefore, that the food element of the recent global inflationary surge has gone off the boil. Although the food price chain is so long that retail prices have not yet caught up with the price peaks reached a few weeks or months ago, you don’t need prophetic powers to know where retail prices are headed over the next 6-12 months – but consumers will have to work hard to get manufacturers and retailers push prices down with the same alacrity they pushed them up.

Yet with all due respect to grains, the real story is in natural gas. This stuff is measured in British thermal units (BTUs) and a few years ago the price was less than $5 for a million BTUs. In 2005 there was a sharp move up to $8, but during 2006/7 the price stayed between $8-9 and in January 2008 it was actually below $8. However, ten weeks later it had jumped to $10.5 and by early July it was through $13.5. Extraordinary, huh? But the downside was much more so! In three weeks the price was back to $9 – yet another example of how the collapse is always steeper than the surge – and this week it fell further, to around $8. The pattern in crude oil has mirrored that of natural gas, but whereas crude oil prices rose more, their decline from their peak has (so far) been about half that of natural gas, in percentage terms.

There is more of the same – from base metals to platinum – but the point is made. The boom seems to turning to bust because demand is fading, thanks to the global recession, and/or because supply is rising. This is incredibly important for the global economy and the speed with which it has happened has left central banks far behind. They are still talking about heightened concern about growing inflationary pressure, but that’s all over. The European and British central banks are still toying with raising interest rates (and the Israeli central bank actually did), even though they all say in the same breath that their economies are slowing down very quickly. They haven’t yet caught up with the good news — that the commodities boom of the last few years is dead – or absorbed the bad news, that the recession it helped spawn is what killed it.

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