By Susan Buchanan –
NEW YORK (Dow Jones)–Commodities can build on recent price strength, analysts said this week, citing China’s import demand, dry weather in the U.S. Midwest and money pouring into managed funds.
Energy, copper, grains and soft commodities have been the leaders this year, while precious metals and livestock lag behind.
Before year-end, the Reuters/Jeffries Commodity Research Bureau Index should scale its March 2005 high of 323.33 and could extend gains next year, observers said. In March, the index reached its highest level since December 1980.
Peter Buchanan, senior economist with CIBC World Markets in Toronto, pointed to China’s thirst for copper to build hydroelectric stations, and said he expects further strength in the red metal. He sees crude oil trading at $65 a barrel next year and gasoline retailing at $3.00 a gallon, saying Saudi Arabia might be unable to raise output from its aging oil fields and noting that Russian oil production has stalled in the last eight months.
Richard Asplund, chief economist at the Commodity Research Bureau in Chicago, said commodities are “currently responding more to their own supply-demand characteristics than to macro factors like the dollar.” A jump in the CRB Index in June was driven by energy markets, while Chinese and U.S. demand lifted copper prices and dry Midwest weather sent grains to new contract highs, he noted.
The dollar bounced in the past three months — normally a bearish factor for commodities, Asplund said. In the last three years, the CRB Index had a strong negative correlation with the U.S. currency, but in the past month the two have shown little relationship, he observed.
Gold futures, however, have been in a “U.S. dollar struggle,” setting back in May as the dollar advanced, CIBC’s Buchanan said.
Bill Gary, president of Commodity Information Systems in Oklahoma City, sees higher commodity prices next year “as Asia’s appetite shows little sign of slowing.”
Gary points to a tight world supply-demand balance for grains and soybeans and dry U.S. Midwest weather. Soybean and grain prices should turn around after a recent setback, and soybean futures at $7.00 a bushel on the Chicago Board of Trade now are a buying opportunity, he said. Soybeans should reach $8.00 a bushel next spring and could head to $10.00 or higher if recent dryness continues.
Corn fields in Illinois, Missouri, Indiana and Ohio are parched, but the crop looks good in Iowa and Nebraska, Gary said. He is “slightly bullish” on CBOT corn, looking for $2.80 to $3.00 a bushel next spring, versus $2.35 now. Gary points to “small wheat crops in Argentina and Australia and a lot of problems in Europe” and sees CBOT wheat at $4.00 bushel wheat next spring, against $3.35 now.
In soft commodities, world sugar futures are rising and can continue to set new contract highs as both physical offtake and technicals improve, said Bruce Cleary with J&F, a New York Board of Trade floor brokerage. A likely cut in European Union prices paid to beet growers in the next two years will discourage production. Orange juice futures meanwhile have headed to new highs in July, with concern about canker disease. Coffee prices eased from five-year highs set in March, but a smaller new crop in top-producer Brazil continues to lend support.
Cocoa is a laggard, however, sliding to new contract lows in July, influenced by war-torn Ivory Coast’s fragile peace plan.
In livestock, the cattle market is dogged by litigation and is awaiting a decision on the U.S. ban on imports of Canadian live cattle, Gary said. Strong meat demand from U.S. consumers bodes well for hog prices, however.
Money poured into commodities this year as managed funds swelled to $1 trillion from $50 billion 10 years ago, according to Brown Brothers Harriman.
U.S. inflation remains relatively tame in the meantime, partly because high energy prices are putting a brake on demand for other products and services, CIBC’s Buchanan said.
The CRB Index is up 9.7% so far in 2005, led by a 38% surge in energy prices, a 17% climb in grains and oilseeds, a 15% gain in industrial commodities such as copper and cotton, and a 4% rise in soft commodities.
Precious metals have lost 0.1% in value since Dec. 31, while livestock is down 11%.
The CRB Futures index consists of 19 futures markets — aluminum, cattle, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, hogs, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gasoline and wheat. The index, which has a 1967 base-year average equal to 100, was revised for the 10th time on June 20 as unleaded gasoline, aluminum and nickel were added and platinum was removed. Component weightings were changed to account for the significance of individual commodities and will be refigured monthly.
In comparison, the Goldman Sachs Commodity Index, which consists of 24 commodities and is skewed toward energy, reached an all-time high of 411.42 last week. About 77% of that index is energy markets, 6.2% industrial metals, 1.75% precious metals, 10.8% agricultural commodities and 4.8% livestock.
Source: Yahoo Finance Singapore