This month’s Barclays commodity report contained the following interesting graph. It shows how the sectors of energy, agriculture, livestock, industrial and precious metals in exchange-traded products funds have changed since the first of this year.
The title of the report was also interesting: The Commodity Refiner. From an age of shortage to an era of enough?
The paper’s forward starts out like this, and you just might find the whole report worth a read…
Spring is in the air and, right on schedule, the familiar swoon in commodities has arrived. But although the price action may be familiar, the causes are less so. For the past few years sovereign debt concerns and financial market jitters have been dominant price drivers, bulldozing their way indiscriminately through markets as diverse as gold, copper and oil with little care for the subtleties of supply or the nuances of demand trends. In contrast, the factors at work recently are much more commodity-specific: investors turning bearish on gold as the prospect of an easing in Fed liquidity injections beckons; disappointing Chinese growth bringing in to question the health of base metals demand; concerns that an unusually high level of refinery maintenance is resulting in a large surplus of crude oil. And the price response, with gold leading the fall, some base metals following but others less affected and energy markets dipping relatively modestly, was suitably differentiated.
Certainly, as the above commentary indicates, outside of cyclical patterns, investment in commodities has not only been driven by supply issue perceptions, but by global banking practices. Note that this viewpoint of “enough”, while some broken records like Jim Rogers may disagree, is congruent with the ongoing overall relaxed outlook about global agricultural commodities over the past several years here at Big Picture Agriculture. This stems from increased production in the BRIC nations, increased industrial production efficiency methods, and increasing mechanization of agriculture. In addition, were it not for sudden recent demand created by biofuels policies, we’d have severe price problems, or at least far less production incentive than we find ourselves with today.
As the following graph demonstrates, agricultural investments are volatile, even “with a rising global population” and more “meat eaters”.
Of concern, is always the energy sector, however. All other commodities in the top graph are impacted by energy costs. The Barclays forward has this important commentary and I always like to compare the dynamics of energy supply to similar dynamics going on in the Ags; think trucks lined up in Brazil to export corn and soy recently or the southeastern U.S. importing corn from Argentina for feed use instead of purchasing it from the U.S. cornbelt this year. The quote is not very reassuring.
Spare capacity and inventory buffers are still relatively low in many markets and this at a time when geopolitical risks are a becoming an ever more clear and present danger, especially to energy supplies from the Middle East. The most obvious friction point at present lies in the severe infrastructure deficits that are creating choke points and preventing the smooth flow of many commodities around the globe. A lack of pipelines, storage facilities and ports of the scale required to get new supplies to where they are most needed is at the heart of the huge increase in regional oil and gas price differentials and soaring physical premiums in base metals. Distribution is becoming the new battleground for commodities and is likely to remain one for some time to come. (emphasis mine)
The report makes this next analysis concerning energy/agriculture.
Meanwhile, perceived ethical issues, and the changing regulatory environment have affected investors’ attitudes towards agricultural-linked notes negatively, which have been extremely quiet since mid-2012 and have received merely $6mn so far this year. For energy-linked investments, 2012 saw a healthy performance, attracting $1,457mn (up 30.6% y/y), thanks to the upside risk for Brent crude oil. However, as market volatility decreases while the general outlook in early 2013 remains bearish, we expect fewer energy issuances in the coming months.
As for weather, the big wild-card, I see increased resilience as seeds advance and as production continues to increase in more regions of the world, the downside being increased extreme weather events associated with climate change. Also, today’s biofuels mandates could be eliminated if weather caused steep supply shortages translating to high food prices, so they potentially provide an added layer of resilience to the Ag commodity and food price system — assuming the political will exists to respond to shortage situations.