Commodity market soothsayers at the big banks have been poring over the entrails of the 2007 market and picking out promising and worrisome organs.
Right now many are focusing on the concepts of decoupling and supercycles.
The good news for farmers is that most analysts think 2008 will be another year of strong commodity prices, including for crops. The bad news is that most also see an almost-as-likely weakening of commodity prices ahead.
Decoupling
For the past year market analysts have been batting around the idea that the world economy might keep growing even if the powerhouse United States goes into recession.
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Generally since the Second World War, when the U.S. has gone into recession, the rest of the free world follows. But in recent years some analysts have seen signs of that trend weakening.
They have argued that with Europe’s economy mostly integrated and bigger than that of the U.S., and with China, Russia, Brazil and India becoming major world players, and with all the other trading economies like Canada’s more sophisticated than in the past, a U.S. slump won’t necessarily mean a world slump.
This is important because most analysts think commodity prices rise with economic growth and weaken on economic decline.
With the U.S. on the verge of a recession, the decoupling theory may come into play.
“The decoupling theory for the global economy will face a stiffer test in 2008,” said BMO Capital Markets deputy chief economist Doug Porter in an outlook.
“2007 did not really give a proper test, as U.S. GDP growth was still reasonably healthy at over two percent. A drop below that pace would be more of a challenge to the global economy.”
It’s an assessment shared by Morgan Stanley’s global economics team, which said in its 2008 outlook: “If global decoupling was the key theme for 2007, global recoupling may well be the dominant issue for the coming year.”
China is a key puzzle for where the market will go in 2008, and a test case for decoupling. People have been forecasting a major slump in the Chinese economy since it began its expansion in the late 1980s, but it has never happened.
But most analysts still expect China to broadly follow the U.S. lead, which is why some worry about the post summer Olympics period.
“We are skeptical that the global commodity cycle will withstand a downturn in U.S. consumption,” said the Morgan Stanley report.
If U.S. consumption drops as it forcasts, it expects Chinese import demand and commodity prices to fall.
China’s demand for soybeans has supported oilseed prices and it has been a key customer for Canadian crops such as malting barley, wheat and canola, so a hit to its economy could threaten prairie farmers.
Supercycles
But along with the decoupling theory, analysts are debating the supercycle theory that gurus such as Jim Rogers have proposed. It argues commodity prices are in a long-term uptrend, likely lasting 20 years from the late 1990s.
“Commodity booms or commodity investment supercycles, as we like to refer to them, occur every 25 to 40 years,” said Francisco Blanch, Merrill Lynch’s head of commodity analysis, in a 2008 outlook.
“You will only get a permanent downward correction in prices when commodity markets become oversupplied. With resource nationalism on the rise and the limited investment that the sector is currently attracting, I think the cycle could last for at least five to 10 more years.”
In that light, a U.S. recession and problems in China wouldn’t crash commodity prices.
“In the long run, we are very positive on agricultural commodity prices due to the growing link to the biofuels market.”
However, Blanch thinks crop prices have less chance of hanging on to the long-term bull market than other materials.
“I don’t think that commodity returns from agriculture will be as good as commodity returns from energy or metals,” said Blanch, noting crop prices tend to return to long-term averages more quickly than other commodities.
What does this mean for 2008 crop prices?
TD Economics hazarded some guesses, which should generally make farmers happy. Overall, it should be a continuation of present good conditions.
It forecasts wheat prices falling to about $300 US per tonne by late 2008, much below the October 2007 average of $387 per tonne, but well above prices in the first years of the decade.
Canola prices have little reason to collapse.
“Looking ahead over the next few quarters, canola prices will remain well supported by tight markets and rising demand for vegetable oils,” said the TD report.
But if the next Australian crop rebounds, prices could weaken in the second half of 2008 and into 2009.
Barley could be the big price winner in 2008.
“In 2007-08, global demand is projected to outstrip supply for the fourth year in the past five … generating further upward pressure on prices over the next several quarters,” the report said.
“With Australian stocks depleted, Canadian farmers appear to be well positioned to benefit from growing export opportunities in China in the near term.”
