A Commodities Correction Is Just That

Crude collapsed from over $112 to under $100 in just a few days. The sell-off in silver was even more rapid and deeper. Agricultural commodities prices have fallen, in most cases, since the start of the year. But, the corrections are only corrections, and the prices of these commodities are likely to move back toward their peaks. The reason for the most part is supply and demand, and not the wild speculation by traders which has pushed prices up and down.

It did not take much to begin the rebound. The US jobs report ignited a sharp rally in gold and oil last week. There are concerns about substantial inflation in China which have not gone away. Wages are a relatively hidden cause. The reports on wage increases given out by the People’s Republic are sporadic and many experts also think they are unreliable.

China does have at least two enemies to replace it as the low-cost provider of finished goods. Wages are one, and the prices of raw materials are the other. The prices of energy and agricultural commodities could move 20% lower but would still be higher by historic standards. Anecdotal information from China shows wages are up by double digits last year.

It may seem strange that this has to be pointed out, but the supply of corn, wheat, and soy are limited. Farmers around the world have made their decisions of which crops to plant for this year. These are what they consider the “money crops” on which they can make the most profit. Much of their production can be stored, at least temporarily, to keep the market tight so that they can benefit from strong demand. That may seem a cruel practice when people cannot find reasonably priced food, but farmers are capitalists and are bound to act like capitalists.

Oil prices have also moved back up again, and the same reasons that made them high last month will make them high again. China needs more crude, even if it is a little less than expected. Saudi Arabia has not released enough oil to replace the flow from Libya. OPEC probably sees high prices as a way to reap huge profits as its members did in 2008. They may fear that high oil prices will curtail the global recovery, but not enough to cut the demand for crude by very much.

Commodities prices are on their way back up, supported by the fundamentals of the worldwide economy, and the profit motives of those who control production and distribution of the commodities themselves.

Douglas A. McIntyre