Finding commodities' crystal ball

By Neville Bennett

Friday 27th June 2003

The price of commodities goes to the heart of values in New Zealand. They affect the balance of payments and terms of trade. They are central to GDP. They affect the vitality of towns and they have an important relationship to the price of rural land.

The National Business Review prints weekly a useful table on commodity prices. I glanced at it last week and was mildly surprised at the range of prices, especially between highs and lows in the year, and wondered if this reflects some deficiency in the markets. There also seemed to be a downward trend in some prices.

Not every price is down. But casein was $11,350 a tonne on average in 2000/01 and now stands at $6770. A venison stag averaged $430 in 2000/01 but last week fetched $225. Steer beef averaged $3.60/kg a couple of years ago but now gets $2.70 (a loss of about $200 an animal). In contrast, lamb has fallen only slightly. Wools are mixed, with fine wools commanding a premium.

The commodities table also includes external markets. UK prime lamb has fallen from $7.02/kg to $6.20 and US bull beef has fallen from $5.46 to $3.26.

As commodities are our lifeblood, my curiosity led to me to the futures market. In my experience the futures market is a brilliant predictor.

The futures market for commodities is enormous and quite differentiated but it is easy to find prices for any commodity. Bull beef is not an item but there are huge trades in "live" and "feeder" cattle.

As it is price trends that interest us, "live cattle" prices were explored. There are a huge number of contracts posted, and each one is for 40,000lb. The present market price is 69USc/lb. It has fallen 2c in a month. The price for June 2004 is also 69c. The outlook for beef is not encouraging.

There is further concern over crude oil. July contracts are for $US30.82 a barrel and the price for July 2004 is $US25.45 with $US24.14 for July 2005. This seems to indicate oil will stay high, which will be bad for global economic activity and therefore commodity prices.

As well as looking at individual commodities, one can gain a broader overview of trends from indexes. I like the Commodity Research Bureau (CRB) index, which is a basket of major raw commodities prices that forms a composite price index. It is a good gauge for tracking the overall trend in commodities prices and for determining inflationary trends that affect the stock and financial markets.

The monthly chart for the CRB index reveals some interesting clues. First, see on the chart above how the index has liked to trend the past 15 years. Also see how a big double-bottom reversal pattern formed on the chart over the past couple years. The CRB index hit a six-year high in February but has since backed well off that.

Is this the beginning of a major downtrend in the CRB or just a correction in an uptrend? Nobody knows at this point but some clouds appear to be forming. Commodities tend to do well in inflationary times but the graph is consistent with the fall in producer prices.

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