Commodity Prices Predicted to Decline

How Dropping Prices Will Affect Consumers and Investors

Commodity Prices Predicted to Decline
September 16, 2015

The near-term future for commodities looks grim and the recently released "Commodity Markets Outlook, July 2015" from the World Bank reinforces this point. The second quarter of 2015 saw most commodities drop by 2% in overall non-energy commodity price indices. Oil prices were actually up slightly during the reporting period, but have taken a recent beating as Brent Crude has fallen below $50 per barrel again.

In the broad scheme, non-energy commodity indices are in a steady four-year decline and energy indices have not recovered in any serious way from the massive drop during 2014. The World Bank foresees the downward trends continuing at least through 2015, with a potential slight rebound in 2016. For 2015, the energy price index is expected to fall by 38.7% while the non-energy index is expected to drop 12.2%. (Note that much of this decline has already occurred.)

As a consumer, lower commodity prices are generally good news for you, but the degree is not always proportionate. Individual commodities can suffer from specific problems that spike through the supply chain and go against the trend of the overall sector. For example, lower oil prices have produced lower costs at the gas pump in general, but the refineries are a critical step in that chain. As of this writing, a major refinery announced unexpected downtime, causing regional gas prices to shoot up almost 50 cents overnight even as oil prices were near their lowest point.

There's not much you can do about things on the consumer side, except decide whether you want to put off buying or buy lower-priced alternatives when possible. However, as an investor, you can decide whether a commodity downturn is a buying opportunity or simply a temporary stopping point in a continuing downward trend. To assess the situation properly, look at the world market as well as domestic factors.

World currency factors have a huge impact on commodity prices, since a relatively strong dollar makes commodities more expensive for overseas purchasers. The recent currency adjustment by China has had a huge effect on prices because of the size of their market and the abruptness of the devaluation change.

How do commodities interact with stocks? Commodity prices do not correlate as well with stocks as they used to. There is still a fundamental relationship between commodity raw materials and manufacturing, but more of the economy is service-oriented now and newer financial vehicles can drive stocks temporarily without a strong manufacturing push. Obviously if you are investing in commodities directly, you will need to consider the likely price trend, but you also need to look over your stock holdings carefully to check for indirect effects.

Oil prices are the most obvious, since oil affects so many elements of the economy from fuel costs to petrochemical feedstocks for a series of finished products. Things as diverse as asphalt to plastic wrap to molded plastic parts can contain petrochemical derivatives. Look for past connections between oil prices and higher or lower profits in your investment companies. Similarly, grain prices can affect restaurants directly but also have indirect effects throughout the food supply chain, even to livestock supplies through the availability of feed.

For detailed outlooks for individual commodities, see the complete World Bank report here.

Do you invest in ETFs that follow indices? Check the holdings in the underlying index for exposure to commodity prices. Some broad indices, such as the FTSE 100, are heavily dependent on them.

In short, look over the supply and demand situation and commodity predictions, but also consider currency effects and the ripple effect of specific commodities as they relate to your stock holdings. Whether you benefit or not depends on which side of the transaction your holdings are on — the supply side or the demand side.


Photo ©iStock.com/scotspencer

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Elaine | 09.16.15 @ 18:03
I have been hearing for quite some time that things will start getting bad all the way around starting this month. Again I say, glad I don't have to participate!
Steffanie | 09.16.15 @ 18:04
We experienced the regional gas price hike a few weeks ago. It was not cool. While it has come back down to a great price, I would prefer it be even lower. There is some great information in the article. Thanks.
Britt | 09.16.15 @ 18:07
I've noticed this a lot lately... it seems many people aren't buying things, thus, prices are dropping to see if it lures them in
Beverly | 09.16.15 @ 18:09
Things are uneasy everywhere as are the people which causes an uncertainty that can be unpredictable. Best not to have your head in the sand trying to live in denial.
Kailie | 09.16.15 @ 18:10
It seems the whole world is getting really messed up lately.
trish | 09.16.15 @ 18:10
Not an investor, but I am definitely the consumer that looks for buying the cheaper alternative, or hold off buying whenever possible. Just the way of life right now.
Tina | 09.16.15 @ 18:11
Is anyone else ready for the big, booming turnaround? It's been bad (and globally) for so long.
Kathryn | 09.16.15 @ 18:12
I have been saying they would for ages, we have been over pricing our people for much to long.
Nancy | 09.16.15 @ 18:15
In this small world, everything is interrelated and the simplest of things can effect so much. Bottomline is that we need to pay attention to what is going on around us and make decisions based on what we see and what we know.
Selena Walls | 09.16.15 @ 18:16
Seems like, financially, a lot of areas are having problems.
Morgan | 09.16.15 @ 18:19
Lots of interesting information in this article. I don't see a problem with prices dropping.. but the reason why is what is scary
Angie Taylor, Insurance Agent in Montevallo, AL | 09.16.15 @ 18:25
That is quite a drop in price.
Christina | 09.16.15 @ 18:30
I noticed lately people are not spending like they used to. It has got harder on everyone.
Angie | 09.16.15 @ 18:30
Another thing I think of when reading this - I'm always rejoicing when the prices of food (particularly meat and dairy) drop. The downside is that my savings generally means that the producers (farmers) are experiencing a drop in income. Wish there was a way to balance it better...
George Middleton | 09.16.15 @ 18:37
It's getting out of hand everywhere. People are starting to buy just enough to get buy,and that is getting hard too...
Clarissa | 09.16.15 @ 18:43
It's time to start shopping smarter. I have started gardening as a way to save a little money. It's healthier foods and I save money.
Stokes | 09.16.15 @ 18:49
Commodity values dropping isn't beneficial to the consumer in the long term.
Rindy | 09.16.15 @ 18:55
It feels like everything is heading in the wrong direction these days. We all need to pay attention and act accordingly. Great article!
Wanda Langley | 09.16.15 @ 19:02
Great information to know. I have heard some of this on the World News. Hopefully by the end of the year things will start to level out.
Meredith L | 09.16.15 @ 19:02
My father always said that playing the market was the biggest legalized gambling stint on the planet. Thinking about all the nuances of playing in the market with commodities, futures, and all that - thank goodness there are professionals who know how to play the game.
Sarah | 09.16.15 @ 19:05
Sadly, anything in finance is subject to the ups and downs. strange in a way, at least to me. something like that should, in essence, be stable.
Sara | 09.16.15 @ 19:07
I have heard that this month is supposed to start the downfall of our economy. If that happens or not only time will tell. However, it really does look like the whole world is a big mess and getting worse.
Apryl | 09.16.15 @ 19:12
Interesting but doubt it will effect me greatly.
Daniel Dohlstrom | 09.16.15 @ 19:13
Such changes in markets recently i am glad we have access to info like this to keep up.
Steven | 09.16.15 @ 19:14
Sadly while I get excited to see milk under $4 and meat down in price because that means I can finally buy a little more. however, that also means that farms are hurting.
Christina | 09.16.15 @ 19:15
Everything boils down to supply and demand -- and what people are willing to pay for what you have.
Katie Greene | 09.16.15 @ 19:21
The last time I heard food prices were supposed to be falling, ours stayed the same and even went up, so who knows how it will really play out. Great information to keep in the back of the mind as things happen
Alec | 09.16.15 @ 19:22
This is the money equavilent to the butterfly effect. One drop in prices in the market causes a domino effect. China's situation effects ours and vice versa. I'm happy about the dropping prices though but I'm worried about what will happen to those same prices when everything picks back up!
Erin | 09.16.15 @ 19:39
I hope things begin to rebound soon. Just like always though, you have to live within your means.
Ron | 09.16.15 @ 20:50
Deflation: The horrific side of market stagnation. This isn't isn't even the oppositie of inflation, this is just pure tee total bad.
$commenter.renderDisplayableName() | 12.05.16 @ 08:23
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