Production of most raw materials exceeding demand as global economy languishes
Commodities’ time as the object of investors’ affection is over for the foreseeable future, says analyst Brad Magnusson.
And that doesn’t bode well for the crop price outlook for the next few years, especially when considering crude oil’s plunge.
“We expect, ladies and gentlemen, that this trend is going to continue,” Magnusson said about the dropping value of crops, metals, oil and other commodities, which began two years ago.
The only things that will reverse the trend are worse times in the U.S. stock market and better fundamentals: more demand and less supply.
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Unfortunately for crop growers, the world is well-stocked with most commodities, and some are glutted. As well, demand is weak in many areas and speculative money has fled commodities and jumped into U.S. stocks.
“Everybody’s bailing out of commodities and into the U.S. stock market,” Magnusson, principal of Magnusson Consulting Group, told the recent St. Jean Farm Days in St. Jean Baptiste, Man.
Magnusson said many are wondering when commodities will hit bottom and when the funds will go back into commodities.
He said the question highlights the points at which general commodity prices are likely to strengthen rather than grind lower.
Magnusson said commodity prices tend to trend together, with aberrations between commodities based on specific supply and demand fundamentals. Where the complex goes is where crops will go.
Last year at this time at Manitoba Ag Days, Magnusson predicted crude oil would drop to $70 per barrel from about $90, and it promptly rose. But after that, the fundamentals on which he based his call came into play and the slump from more than $100 per barrel to today’s prices of less than $50 began.
Magnusson thinks oil might stick for a while around $40 but that lower prices are likely, at least temporarily.
“We anticipate $30 a barrel oil,” he said.
Magnusson thinks general commodity market fundamental strength won’t recover until Europe’s and China’s economies bounce back from recent slumps. That would re-ignite real demand.
Overall, farmers should not expect generally stronger crop prices unless a massive event causes serious shortages. The market-wide impact of the commodity boom is gone.
“We’re definitely on the back side,” said Magnusson.
