Western Producer reporter Ed White is talking to the world’s top market analysts to bring a range of philosophies and insights into the current financial crisis. In this series, the analysts discuss what happened to predictions about the world being in a long-term bull market for commodities and whether the financial crisis changes the long-term outlook for commodities farmers produce. This is the fourth in the series.
It was just few months ago, but the world in which predictions of a long-term commodity bull market went unchallenged now seems distant.
Read Also
Green lentil market oversupplied
Farmers in Western Canada can expect price pressure on their new crop of green lentils, as the available supplies among the world’s major lentil-growing nations increase significantly.
Most crop prices began a plunge about four months ago, but the self-confidence of the bulls has been under assault by many critics, some of whom argued before the peak that the rally wouldn’t last, and others who now feel the plunge negates any claim that a long-term rally is a sure thing.
Two Canadian market prognosticators were among the world’s most authoritative long-term bulls, and their views are worth considering. Neither called for the major blowup in values that has occurred, but both anticipated major economic problems for the world economy. Neither says a short-term liquidity crunch changes the fundamental reasons to believe in an end to the long-term commodity bull market.
Jeff Rubin is with CIBC World Markets. He is well known for his calls for $200 per barrel oil and his belief in the peak oil theory.
Here are excerpts from what he said in his June 26, 2008, StrategEcon report, days before the beginning of the commodity slump.
“With the basic laws of supply and demand no longer operative in crude oil markets, we are compelled to once again raise our target prices for oil. We are lifting our target for West Texas Intermediate by $20 per barrel to an average price of $150 next year and by $50 per barrel to an average price of $200 per barrel by 2010.
“Upward revisions to our call for still-higher oil prices will add to the pressure on the Fed to calm inflation expectations by raising rates. Best bets for the first move are right after the November elections.
“We raised our end-of-2008 target for the TSX by 700 points to a still moderately cautious 15,200 while maintaining our earlier 16,200 target for the end of 2009.”
Since then, oil has fallen to $60 per barrel, the Fed and most other world central banks are slashing interest rates and the TSX is below 10,000 and would need a rally of nearly 60 percent to hit the June target by New Year’s Eve.
But Rubin’s view has not fundamentally changed. The following is from his Oct. 31 StrategEcon report.
“The latest GDP growth and other numbers make it clear that the U.S. has now joined Europe and probably Japan in recession. But that recession looks neither deep enough nor global enough to validate the massive haircut in energy and other resource stocks, as investors indiscriminately dump assets levered to global growth.
“Although our 12,000 end-of-2009 target for the TSX points to longer-term upside, we have opted to add more weight to defensive sectors like consumer staples and utilities this month. That is in recognition of some still very pronounced near-term risks.
“If triple digit oil prices are what started the recession, then $60 oil prices are what will end it …. Of course, where do you think oil prices will be once the economy recovers?”
Donald Coxe is the BMO Financial Group global portfolio strategist and known for the biting humour, acid-tongued criticisms and gutsiness of his Basic Points reports. He has been one of the most prominent promoters of the notion of a long-term commodities bull market.
This is from his Nov. 8, 2007 Commodities After the End of Disinflation report in Basic Points.
“We announced the birth of the great commodity bull market, which would last at least five years in February 2002. This new calf’s arrival was virtually unnoticed on Wall Street. As it grew into a frisky bullock and then a rampaging bull, we argued it would prove to be the greatest commodity bull of all time ….
“This month, we make our forecast for the next five years. During that time, we foresee just one major setback for commodities – a U.S. recession, which may or may not trigger a global recession. This could come as early as next year, thereby ensuring Hillary Clinton’s return to the White House ….
“Our conviction that investors should continue to emphasize commodities remains. Over the next five years, commodity stocks’ outperformance of most major stock indices will be, we believe, at least as great as the past five.”
The bull conquered many analysts’ hearts and held it until July 2008, a U.S. and global recession is beyond doubt and Hillary Clinton is not in the White House.
In his Oct. 8, 2008, Basic Points report, Coxe has a section entitled Is the Commodity Story Dead? He concludes the answer is no, and makes these investment recommendations.
“Long-term investors should not delay much longer in picking among the wounded commodity stocks on the market’s bloodied battlefield. The best of these companies are among the best the world has to offer in terms of importance to the global economy, competitive position, balance sheets, cash flow and management quality ….
“The agriculturals have been savaged to an astounding extent. The global food crisis has been put on hold, but it will take only one medium-sized crop failure to bring it back with even greater intensity.
“Commodity prices fall during recessions but the real value of great commodity stocks does not. Why? Because recessions are devastating to smaller, undercapitalized commodity producers, and they become easy pickings for the majors once they see light at the end of the tunnel.”
Like Jim Rogers, whose views were profiled earlier in this series, neither Rubin nor Coxe feels that the present slump, as gigantic as it is, counteracts the many reasons that commodities should be strong for most of the next few years.
