Grains lead the way as global commodity prices decline

The prospect of a huge U.S. crop harvest has hammered crop prices down to multi-year lows.

Rising supply is the main factor in grain price weakness, but commodities in general are also declining in value.

After rising to a two-year high in June and out performing the S&P 500 stock index in the first six months of the year, the Thomson Reuters/Core Commodity CRB Index, a measure of prices for 19 commodities, had declined for 11 straight trading sessions as of July 11, the longest decline in records going back to 1994.

The rout in crop commodities is leading the march down but they are not alone.

Investors may be thinking that the rally in commodities in the first half of the year has run its course and commodities could be out of favour, at least for a few months. (This does not apply to livestock and meat, which have posted record highs because of the small North American cattle herd and the virus killing baby pigs.)

Commodities include energy, precious and industrial metals and minerals, “softs,” which include coffee, sugar, cotton, orange juice and lumber and agricultural commodities, grain, livestock and meat.

The rally in the first half of the year was fuelled in part by expectation that the economic revival in the United States and Europe would gather momentum in 2014.

However, growth is more modest than expected.

Some investors think opportunities for gain are better in the stock market, even with major indexes such as the Dow and TSX composite at or near record highs.

Crude oil is a major component of the commodities sector.

A trip to the fuel pumps might indicate otherwise, but crude oil prices look set to fall.

A technical reading of the Brent crude oil price chart shows weakness, particularly after the recent rally associated with the turmoil in Iraq stalled and prices edged lower. Sunni militants might have taken over a large part of Iraq, but that has not cut global oil production.

Speculators had been loading up with long futures positions based on expectation of rising oil prices, but if the cash price continues anemic, then the speculators could start selling and the rush to the exit could trigger a sharp correction lower.

Iron ore prices have fallen to the lowest level since 2012. Iron ore production expansion projects around the world are turning out more product, hoping that China demand will take the supply. But China’s growth has slowed and ore inventories are rising.

Commodities could make a comeback in the coming months.

The stock market is due for a downward correction so its allure could fade.

The particularly cold winter stalled U.S. economic growth but it now appears to be back on the growth path. If it ever builds up some steam, then demand for commodities should pick up, supporting prices.

However, all this is simply background to the grain and oilseed market. As long as the U.S. Midwest crop is on track for a bumper harvest and world grain stocks look set to increase, crop price trends will be weak.

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