Outlook: Economic Slowdown Could Pinch Demand For Some
(Kitco News) - The economic
slowdown expected in China and a potential recession
in Europe is expected to pinch commodities demand at
least early in 2012.
Just how much it will dent demand is up for debate.
Some market watchers have lowered their price forecasts
for the year across the board, and others said it might
be better to be on the sidelines for the first half
Yet others said 2012 could be a year that rewards investors
who are choosy in their commodity selections. Commodities
analysts’ who see value in some markets are selecting
livestock and gold as two areas that might outperform
the sector as a whole.
The concerns about the economic health of the eurozone
hit nearly all financial markets, commodities included,
as investors moved out of risky assets and sought out
safe havens, in particular the U.S. dollar. This desire
to preserve capital in the most liquid market around
had a double whammy effect on commodities. Not only
were they hit by thoughts that a recession in Europe
would ding demand, but being valued in greenbacks made
the goods become more costly as the dollar rose.
Hussein Allidina, head of commodity strategy at Morgan
Stanley, said the reason for the dollar’s strength in
this case is important. “Historically, we have seen
periods where both the U.S. dollar and commodities have
rallied, owing to strength in the U.S. economy.
Conversely, any dollar strength in 2012 is more likely
to be a flight to quality. The implication for the global
economic environment under such a scenario is a bearish
signal for commodity demand,” he said.
Karl Setzer, commodity trading adviser at MaxYield
Cooperative in Iowa, said the gain the dollar had a
significant impact on the grain markets, which were
already in a downtrend. Corn and soybeans had made their
high for the year on Aug. 30 and Sept. 1, respectively.
Wheat, which is on a different growing cycle that corn
and soybeans, saw its highs set in February and has
been falling since.
Regarding corn and soybeans, Setzer said, “what we’ve
seen over the last quarter is a fundamental shift. Over
October, November and December, there’s been a major
shift where we’ve seen demand for grain just imploded.
Nobody wants grain at these prices. It’s starting to
affect the overall dynamics.”
Grain markets have rallied in the last week of the
year, but part of that is likely year-end book squaring.
This late rally has helped the overall performance of
corn, but soybeans and wheat remain weak. Through late
December corn prices are up 12% on the year, while soybeans
were down about 9% and wheat was down 25%.
As an example of the impact of high prices, a stronger
dollar and lower demand, Setzer said corn exports are
down about 14% year-to-date. While ethanol production
in the U.S. is up a bit, it hasn’t offset the slump
in foreign sales and feed demand domestically and globally
is also down.
Grains aren’t the only commodities that have been weakening
in the late-2011 rout. Just about any other commodity,
whether it is livestock, sugar, coffee, or metals, have
all seen values fall.
Shawn Hackett, president, Hackett Financial Advisors,
said it’s not surprising to see price breaks across
the board, given the economic outlook and financial
jitters. He said more losses are possible into the first-half
of 2012, with the second-half of the year a time for
these markets to build a base in time for a 2013 rally.
This is especially true if the market is setting up
for a repeat of 2008.
“Like in 2008 we hit the lows hard. In the end of 2008
to the spring of 2009 it bottomed out. We had the surge
from 2009 to spring 2010. I see a lot that’s analogous
to 2009. (At the time) we had a lower first half and
then rallied into the second half of the year. We could
really rock and roll in 2013 where we could have another
exciting up move,” Hackett said.
Because he believes that more losses are commodity
to the raw materials market, he advises staying on the
Rabobank said they see lower average prices across
the board for agricultural commodities. Aside from the
usual risk weather brings to crops, there are four other
risks: economic slowdown, the U.S. dollar and speculator
involvement, policy risk and capacity constraints.
Higher supplies of most commodities and slowing economic
growth could mean lower prices, but that emerging market
demand will prevent a collapse, they said. Lower prices
could encourage inventory-building, especially in the
emerging markets, they added.
The rise in the dollar has hit commodities, but by
2012, dollar weakness may reassert itself, they said,
once the focus from troubles in the EU is removed. Monetary
policy in the U.S. remains loose and there is still
the possibility of more quantitative easing. If that
is the case the U.S. grain markets will benefit the
most from the dollar falling.
Further, with prices expected to be down from 2011’s
levels, it removes the specter of inflation and also
a compelling reason for speculators to buy agricultural
commodities indiscriminately, Rabobank said.
Their base case for commodities is that agricultural
markets will stumble along in a low growth global economic
NOT EVERYONE’S TOTALLY BEARISH
Allidina said because economic growth is expected to
be low, it isn’t “prudent” to buy commodities across
the board. He said Morgan Stanley favors “commodities
with supply constraint stories are … likely to outperform
as demand is unlikely to be a material contributor to
tighter balances, at least in” the first half of 2012.
John Person, president, NationalFutures.com, said livestock
prices should do well in 2012, with cattle prices leading
He said the drought in Texas was severe enough for
ranchers to cull herds, which has lower supply. As beef
rises, pork should benefit from consumers who are looking
for a cheaper red-meat alternative. But, he said, those
looking to buy beef should think about getting long
the summer futures contract months, rather than the
nearby contracts. That’s because as ranchers bring more
cattle into slaughter, that puts more supply on the
market in the near-term.
Allidina also favors cattle, expecting 2012’s price
for live cattle to rise 10 cents a pound over 2011’s
average price, to $1.25 a pound. Feeder cattle prices
are expected to rise to $1.49 a pound in 2012, versus
2011’s average price of $1.34.
“Continued strength in U.S. beef export demand, coupled
with high feed costs and contracting feeder cattle supply
all bode well for U.S. live cattle prices,” he said.
Rabobank is less enamored of livestock, but said of
all the animal markets, beef may do best. They said
the reduction in demand in the U.S. because of reduced
income and altered diets is being offset by emerging
market demand. They also said the high number of speculators
in the livestock markets leaves it vulnerable to selling.
Person also said there’s a lot of interest by investors
to buy natural gas, especially as the need for cleaner-burning
fuels increases. “Everyone has wanted to get long, but
I’d be a careful buyer. I like nat gas under $4 (per
million BTUs),” he said.
Allidina warned that natural gas remains in a significantly
oversupplied situation in 2012, even as production growth
is slowing. But he agreed that new emission regulations
should benefit natural gas and help create a floor for
prices, adding that “slowing gas-directed drilling may
begin to help tighten balances by late 2012.”
He also likes gold for 2012, with a forecast of $2,200
an ounce. “The defensive nature of gold should continue
to support investment demand as investors look for safe
havens. A continued low or negative real interest rate
environment will also provide support,” he said.
By Debbie Carlson of Kitco News