Commodities Make a Comeback

How War and Drought Made Raw Materials Hot Again

Commodities Make a Comeback
August 28, 2014

Commodities took a beating in 2013, with $50 billion withdrawn from the raw materials market due to investment losses and fear. However, they have made an impressive rebound so far in 2014. With an estimated $5.9 billion investment increase in the first half of the year according to Citigroup, commodities had the best first half performance of the major asset classes.

Aakash Doshi, a vice president with Citigroup Global Markets in New York, identified weather and geopolitics as two of the main reasons behind the increase. Certainly, they have contributed in important ways, and the end of the first half of the year represented a high point in these influences.

Horrendous weather in Brazil and coffee rust fungus in Central America created coffee shortages earlier in the year, which spiked prices. Fortunately, a backlog of beans from the previous year’s crop has blunted the effect on coffee prices, but in an El Nino year, there are potential threats to other commodity markets from Indonesian palm oil to West African cocoa.

With conflicts all throughout the Middle East, and highly unpredictable situations in Iraq and Ukraine, oil prices hit a nine-month high toward the end of June. Meanwhile, the situation in Russia created uncertainty in the natural gas market and potential for a future price spike.

Gold and other precious metals are beginning to recover from the pummeling they took in 2013, in part from global uncertainty and in part from the effect of continuing low interest rates from many central banks.

Beef and pork prices had also been rising dramatically – beef from the lasting aftereffects of the drought of past years leading to a lack of sufficient feeder cattle in the system, and pork from a virus that wiped out a significant chunk of the supply.

Put together, these factors produced a dramatic comeback for commodities in the first half of 2014. Will the rebound continue? So far, results suggest the answer is no – but that is subject to change at the drop of a hat.

The Bloomberg Commodity Index, an index composed of 22 important raw materials, rose 7.1% in the first part of the year, but almost all of that gain has been erased as of mid-August.

Since the end of June, there have been significant drops in the commodity futures for lean hogs, live cattle, cotton, and orange juice. Wheat, corn, and soybean futures are all significantly down as well – ironically from the weather. Unusually good weather and decent rain in many of the growing areas of the Midwest are producing what is expected to be a record crop.

Oil and gas futures have dropped as we enter what appears to be relative stability – but relative is the key term. There are so many potential areas of unrest between Iraq, Russia and Nigeria that a rise in oil prices seems more likely than not. Natural gas could follow suit if the Russian incursion into Ukraine causes sanctions that make Putin retaliate by restricting the supply to Europe.

Coffee and milk prices are still high – so you latte drinkers are holding up the commodities market. Hang in there.

If you weren’t invested already, it is possible you may have missed this commodities peak – but world events may swing investor sentiment back toward commodities later on this year, especially with energy commodities. Based on the performance in the first part of 2014, you may want to add the weather report and the evening news to your list of sources for investing information.

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