Spotting the turning point for commodity investors is more difficult than ever

As commodity prices crash below levels last seen at the nadir of the financial crisis its worth asking when, or indeed if, the cycle will turn and commodity prices will bottom out.

From an investors point of view commodity futures returns (which include the spot price and the risk premium from taking on hedging risk) are linked to the state of inventories in the economy. And so commodity returns can therefore be expected to be a lagging indicator of recession.

During the late-expansion period (anticipating a recession), low inventory levels imply that commodity futures experience higher-than-normal returns. Further, because of inertia in inventories, it is not until a recession sets in that commodities experience low returns (i.e. where we are now). Coming out of a recession, commodities futures returns have tended to improve only after the early expansion period has begun.

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Livestock prices: The top 10 most important drivers

This is the second in a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 2 looks at livestock.

1) Feed prices


snake.eyes / Foter / CC BY-NC-ND

If feed grain prices increase (so that total input costs rise) the cost of raising livestock also goes up, reducing margins for farmers. Rather than feed cows, pigs and chickens at flat to negative operating margins, livestock owners may opt to slaughter more of their herd instead.

This then supplies the market with excess meat and drives prices lower in the short-term. In the long-term, equilibrium in operating margins is restored by either greater supply of feed grains driving input prices lower or decreased livestock production increasing market prices.

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Sugar prices: The top 10 most important drivers

This is the start of a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 1 looks at sugar.


howzey / Foter / CC BY-NC-ND

1) The Brazilian Real

Brazil is the largest producer of sugarcane, producing around 740 Mt in 2013, almost 40% of global output. A decline in the value of the Brazilian currency, the real increases the incentive for Brazilian farmers to increase output for export while at the same time reducing their production costs.

Millers in Brazil can crush sugarcane to make ethanol for the domestic fuel market, priced in reals, or sugar for export, priced in dollars. A decline in the value of the real versus the dollar encourages Brazilian producers to divert more to the export market.

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