The State of Commodities
by Julia Bussie

Commodities historically trade counter-phase to the stock market, so even before the 2000 top in the stock market, analysts were looking to commodities as the next bull market.

It took a year, nice bull market ensued. Are the commodity markets booming, bubbling, has the bubble already burst?


Commodities struggled for the first year as the stock market fell. But, after the WTC disaster, the government started pumping up the money supply and commodities responded.
Nice 2 yr run. Where do we stand now?
To an Elliott waver this looks like a fifth wave up from the 2001 low is underway.

Headlines often serve as contrary indicators and these 2004 headlines were excellent indicators of tops.



Very widespread participation. Soyoil – 20 year highs, Copper – 9 year highs (copper made new highs this past week)

Corn – 8 yr high, Gold – 15 yr high, Platinum – 24 yr high, Soybeans – 16 yr high, Soymeal – 31 yr high, Silver- 17 yr high , Wheat – 6 yr high
Lumber – 8 yr high, Hogs – 7 yr high,
Feeders, pork bellies, unleaded gasoline all made all time highs for the contract.

These markets topped earlier and were already in bear market rallies.
Oats 6 yr high in 2002.
Palladium - all-time high 2001. Cattle - all-time high in 2003.
Cocoa - 18 yr high in 2003.
Natural gas – all time high in May that is close to being surpassed now.

OJ – bear market bottom in May 2004.
Cotton – 18 yr high in 2003, solid bear since.
Sugar – choppy, sideways bear market.
Crude oil and heating oil are the energizer bunnies of the commodities markets.

Fear - terrorism. War in Iraq created a “war premium”. No disruptions in supply have occurred so far as a result of the war, although Iraqi oil shipments have had their ups and downs. Actual level of war premium difficult to determine.
$ - After 2001 attacks, US flooded world with dollars, mostly deficit dollars. Dollar declining since. 90% of world commodities are priced in U.S. $. Cheaper dollars benefit U.S. exporters, notably U.S. agricultural exports increase when the dollar is low.
Globalization -  WTO and NAFTA consequences not as anticipated. Fewer constraints on trade help poorer countries, level economic playing field. Problem - in order to level a field, something is taken off the top to fill in the low spots. The U.S. is at top. Our standard of living will be reduced as other nations compete with us for jobs and goods.
Jobs and manufacturing transferred overseas. Labor costs overseas are a fraction of U.S. U.S. prices are inelastic, reflecting labor not raw material costs.
Income from those jobs providing seed for economic booms of unprecedented proportions. A third of world’s population being fast-tracked into 21st century. In the process, they are competing with developed world for world’s supply of commodities. May be rude awakening for Americans who believe we are entitled to material lifestyle. Of primary concern is India and China, most notably China because it is progressing faster.

Population – 1.3 Billion, 1/5 of world, 60% rural
Land Mass – slightly larger than U.S.
Arable land – 7% of world total, U.S. has 19%
Fresh water – 7% of world, Great Lakes Basin alone holds 18%
Oil – 5% of world, U.S. 2%*  A recent announcement by the China Ministry of Land and Resources stated proven reserves at 47 billion barrels, almost double the current accepted British Petroleum estimate for China.

Density, the City of New York has 26,685 people/sq mile. The urbanized area of Shanghai has 42,415 people/sq mile.*
From 1950-1970 China pop. doubled. BIG baby boom. After 1970, one child law established and legal age to marry raised 27.
Large segment of population of working age.

Cement - 40% of world prod., demand is 6 times U.S.
Steel – production 220 mil tons/yr, imports 40 mil, plans to add 200 mil tons production
Iron Ore – imports 14,000 tons 1990 to 148,000 2003
Coal – exports declined to 55 mil tons in 2004, were 80 mil in 1991 due to increased demand for use in domestic steel production.
Now, net importer coking coal. World thermal coal prices up 20% in 2003, up 40% more in 2004.
Aluminum – net exporter in 1998, now net importer despite 238% increase in production over the last 4 yrs.
per capita use is 1/5 U.S. (China 3.2 kg, US 16 kg, India .5 kg per capita)
Oil – Still modest importer, has displaced Japan as worlds #2 consumer.
Copper – share of world demand increased from 6% to 27% in ten yrs, per capita still < 1/3 U.S.
Platinum – imported 20,000 oz in 1990, up to 1.6 mil oz in 2003
Grains – domestic stocks drawn down over past 5 years. Imports forecast to double by 2020 by World Bank,  USDA est. imports to quadruple.
Soybeans – imports exceeded production for first time in 2003.
Cotton – produces 27% of world cotton, consumes 34% (some of this is for re-export), U.S. textile manufacturing shift to China.
Meat –consumption is 35 lb/cap/yr, Taiwan - 180 lb, U.S. - > 350 lbs.
not a large importer at this time, domestic prod tripled from 1986-1996 mostly in pork.
Avian flu a concern across Asia for poultry production.