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Commodities markets show signs of cooling
By Stevenson Jacobs
Associated Press
Jul 24, 2008
NEW YORK - Only a month ago, sizzling commodities prices seemed destined to soar higher with record-breaking rallies in crude oil and corn. Now the boom appears to be taking a breather, cooled by a weakening economy and a milder Mother Nature.
In just seven trading days, oil has lost more than $20 a barrel, or 14 percent, as record energy prices eat into demand. Since the beginning of July, corn has fallen 21 percent, soybeans 12 percent and wheat 8 percent, as ideal farming weather boosts Midwest crops that had been battered by recent floods. Even gold, a bellwether of the commodities boom, has lost ground, falling 6 percent in the last week.
Commodities turned even lower yesterday in the second straight sell-off, with silver, copper and wheat all trading lower. Oil fell $3.98 to close at $124.44 on the New York Mercantile Exchange.
Analysts are not ready to say the sharp upward spike in commodities this year is over, noting that such statements in the past proved premature. But most concede that the steep drops in energy, grains and precious metals at least signal a slowdown in the frenetic futures markets, possibly providing much-needed relief for consumers struggling to cope with soaring prices at the pump and in the grocery aisle.
"Commodities in general have cooled a bit, " said Darin Newsom, an analyst with DTN in Omaha, Neb. "We had such an enormous run, and big rallies lead to corrections. The great question is whether it's long term or short term."
He noted that the seemingly relentless drive in commodities - crude oil and corn have both doubled in the last year - was built largely on robust demand for raw materials, especially in fast-growing economies in China and the Middle East. A weakening U.S. dollar fed that demand by making dollar-denominated commodities cheaper to overseas buyers.
But with record energy prices and soaring costs for other commodities, "a lot of that demand has died out," Newsom said.
The turnaround is on full display in the once white-hot grains market, which shot to record highs in June after devastating floods swallowed chunks of the Midwest and wiped out corn and soybean fields.
Corn prices neared an unprecedented $8 a bushel, forcing the temporary closure of several ethanol plants that use the grain as their main feed stock. Livestock owners also suffered, as the rocketing cost of corn-based animal feed made raising hogs and other animals unprofitable.
But things brightened this month as a burst of warm, dry weather blanketed flood-stricken areas, drying out waterlogged crops and boosting hopes of a decent - maybe even good - harvest. The optimism has helped push corn prices down by more than $2 a bushel, low enough for some end users to start buying again.
Beyond the good weather, a shift in investor sentiment has also weighed on commodities prices.
In recent weeks, analysts say, large funds have begun pulling money out of commodities as slowing economic growth has led to dropoffs in buying of such things as copper used in industrial wiring and steel used in skyscrapers and airplanes.
Tighter government scrutiny on commodities trading - including a congressional proposal that would ban pension funds from futures trading - has also rattled investors and prodded them to cash in long positions ahead of any restrictions.
"We're in a commodities liquidation mode," said Richard Feltes, senior vice president and director of commodities research for MF Global in Chicago. "People are heading to the sidelines, basically saying 'Let's see how this turmoil is going to shake out.' "
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