26, 2008 -- In the first six months of 2008, commodities enjoyed the best first half of any year since 1973. Since late June, however, fears of slow economic growth, a rise in the value of the US dollar and the worst credit market environment since the Great Depression caused commodity prices to crash.
The CRB index of 19 commodities has declined more than 22 percent since June and
should post the largest quarterly loss since 1956.
For the commodity markets 2008 has been a roller coaster of emotions with a huge rally followed by an enormous decline. There has been something for the bulls and something for the bears. But now what?
Market strategists at Goldman Sachs told Bloomberg News this week that, '"commodity markets are ''oversold'' and the ''bull cycle'' for energy and raw materials producers is far from over as '"severe supply restraints that have led to high and rising prices in recent years remain intact."' A strategist with G-S stated that Goldman Sachs Commodity Index of 24 commodities should return 17 percent in the next 12 months. The strategist also acknowledged that the index is down 26 percent since the end of June.
A "severe supply restraint" is an admission that supplies are tight. In the soybean market for instance, ending stocks are pegged to be 135 million bushels, meager by historic standards. That estimate is based on the assumption this years soybean yields will be no lower than 40 bushel per acre. In early October, another guess about yields will be announced and the USDA may raise or lower the estimate from 40 bushels. If yields for soybeans drop to 39 bushels an acre or lower, it will place ending supplies at their lowest levels in history and suggest that a dynamic and possibly painful demand rationing rally is needed in order to keep the US from running out of soybeans. That is the very sort of 'severe supply restraint' that Goldman Sachs is talking about.
Another "severe supply restraint" can be found in the cattle market although current prices do not reflect tightness or even hint that a shortage of beef is at hand. Lately, cattle prices have declined to some extent because producers have been selling off cows. Year to date cow slaughter is up 13 percent from last year and last week it was up 18 percent from the same week a year ago. Such a trend hints that over the short and long term, beef production is peaking and much higher cattle and beef prices are likely.
AgResource in Chicago had this to say about cattle prices. "A dramatic bull market in beef is developing as diminished supply is unlikely to be offset by a cumulative lessening in demand. Cold stored US beef stocks could reach near record lows by the end of the year further exacerbating supply tightness." If Goldman Sachs composed that sentence they would label cattle a, "severe supply restraint" market. And so would I. Let's look at Texas Tea. On Monday, October crude oil prices rose as much as $25.45 a barrel to $130 a barrel before settling at $120.92, up $16.37. Five days earlier, the market was approximately $90 a barrel. The contract did expired at the end of the day and broke the previous one day price jump of $10.75 a barrel set back on June 6.
In March 2005, Goldman Sachs became the major firm to forecast that crude oil prices would spike to $105 because demand was stronger than anticipated. They also predicted a sell off with crude when prices were up near historic highs. The reason prices would weaken was because Chinese imports would slow as the country relied on existing inventories during the Olympic games. Goldman Sachs wrote, "we continue to expect strong Chinese buying to return to the market as China restocks after the Games. For oil we continue to believe this will require crude oil prices to move back to $149 a barrel by year end."
If Texas Tea can rally from $90 to $130 a barrel in five days I would say the market has some sort of, "severe supply restraints" impacting values in a bullish manner. Crude oil prices rise much faster than they decline which of is a sign of a market in short supply.
The Mother of All Bailouts was conceived this week by Congress, the Treasury and The White House. It appears to a be a done deal. According to sources, bazillions, yes, bazillions of dollars will be dumped into the financial markets to buy up bad mortgage backed debts from banks and other financial institutions. The U.S. economy will soon to be swimming in dollars!
Here are my views about the rescue plan. One; expect bazillions more to be dumped into the marketplace before the mess is over. Two; Congress, The Treasury and The White House have insured that inflation and its bullish impact on markets with, "severe supply restraints" will be with us for years to come.
A ferocious tug-of-war is taking place in the world of commodities between inflation and recession. Between tight stocks (supply restraints) and weak demand. I expect inflation to win.
(The information in this article is the opinion of Commodityinsite.com's Jerry Welch and subject to change without notice.)