Metals Correction Hardly Threatening, But Is The Next Boom In Agriculture?

Array
(
    [0] => Array
        (
        )

    [1] => Array
        (
        )

)

By Greg Peel

The weight of opinion, of everyone from metals analysts to the tea lady, appears to have prevailed in commodities markets. Runaway metals need to correct and when they do get ready to buy – prices are overblown but the song remains the same as far as demand/supply is concerned.

Barring any unforeseen shock, which if I knew what it was it wouldn’t be unforeseen, this little shake-out is probably over, given the number of analysts suggesting that buyers should be ready to pounce. Ho hum, it was all a bit of a yawn in the end.

There are still those fearing Armageddon in metals markets, for which the usual response is "Armageddon out of here", but when you look at the numbers it hard to be overly fearful.

Copper has fallen 7%, but in May the price rose 21%. Zinc fell 12%, but again the price rose 21% in May, and is up 78% for the year. Gold’s US$40/oz fall seems large by normal standards, but pathetic by this year’s standards.

Barclays Capital points out that metals are indeed the most vulnerable commodities in the face of any change in global growth expectations. However, interest rates remain "accommodative", and there is no sign of any significant drop in demand from the likes of China and India. There are also continuing concerns about inflation, and a weak US dollar, which can only be supportive for gold. Nor does the oil price look like collapsing in the face of ongoing geopolitical tension.

While the grand focus has been on metals of late, little attention has been given to the so-called "soft" commodities, ie grains, beans, sugar etcetera, perhaps best described as "food".

While we have watched in awe as China has munched up the world’s resources like a Pac Man, much consideration has been given to one billion odd people discovering mobile phones, fridges and cars. But the first gain from any increase in general wealth is that suddenly the sort of food we take for granted becomes affordable for the first time. Long before the average Chinese can afford a car, they can afford Macdonalds.

Agricultural products are volatile commodities, the prices of which are determined more by the weather than anything else. But while the secular shift in industrial commodities has been well documented, the potential for the same shift in food has not.

Click to view our Glossary of Financial Terms