The tide of hedge fund and investment pool money that washed into commodities over the last year is now flowing out, pulling down the price of everything from oil to metals to grain and oilseeds.
One reason the funds moved into commodities was because they were seen as a hedge against inflation. As the price of commodities rose, especially oil, it fuelled inflation that eroded the value of other assets. Putting money in commodities meant that the investment would keep pace with inflation.
But eventually commodity prices rose so high that it reduced demand and set the supply-demand balance on track to lower prices.
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Another factor was the relationship between commodity prices and the American dollar.
Because commodities tend to be valued in American currency, when the U.S. buck fell over the past two years, it made commodities less expensive for countries whose currencies rose relative to the greenback. This helped spur demand that further supported commodities.
But in the past month or so the American dollar has risen, not because the U.S. economy is doing well, but because the economic slowdown there is spreading, forcing Europe to cut interest rates and making the euro less attractive.
Investment funds had their own problems. Many of them registered losses in the U.S. housing mortgage meltdown and can’t afford losses in the commodity part of their portfolios and so are selling now before commodity prices fall below their purchase point.
So commodities are down across the board. As of Sept. 15, U.S. oil was down 35 percent from the peak of $147.27 per barrel set July 11, gold is down 25 percent and silver down 49 percent from their highs set March 17, and copper is down 23 percent from its July 2 peak.
Chicago wheat is down 47 percent from the peak Feb. 27, corn is down 28 percent from June 27 and soybeans are down 30 percent from July 3.
For grain prices, in addition to the larger economic issues, the funda-mentals of supply and demand weakened prices.
We are well into the Northern Hemisphere harvest and yields have been good generally. The immediate supply concerns have lessened.
However, grain prices have long-term support from still historically tight global crop supplies, especially for corn and soybean. The lowest ocean shipping costs in a year should also encourage demand.
Wheat might be the weak sister of the grain market. There has been a huge turnaround in the world wheat crop with the U.S. Department of Agriculture forecasting a record 676.28 million tonne crop, up from 610.87 million. Stocks at the end of 2008-09 are expected to increase by 21.4 million tonnes.
There will be a lot of feed wheat in the world this year. Feed barley supply will also build. The increased availability will help to offset a reduction in corn production.
It is a similar story in oilseeds where increased canola and palm oil supplies will help fill in for tight soybean production.
On Sept. 15, grain traders were trying to assess the damage done to the U.S. Midwest crop from heavy rain associated with Hurricane Ike. The biggest concern was how long the rain would delay harvest.
