A year after Citigroup Inc. declared the decade-long run of commodity gains over, wacky weather, dead piglets and Vladimir Putin have gotten in the way.
While Citigroup rang "death bells" in April 2013 for the synchronized super cycle fueled by economic growth in China, extreme weather and supply squeezes led to surprise rallies in 2014’s first three months. Coffee hit a two-year high, cattle and hogs rose to records and nickel had its best quarter since 2010. Gold rebounded from the worst rout in 32 years after Putin’s incursion into Ukraine’s Crimea region set off the biggest standoff between Russia and the U.S. since the Cold War.
Commodities are "still a powerful hedge," Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees $115 billion, said in a telephone interview. "Things happen that we don’t anticipate, whether it’s an invasion in Ukraine or twice as much snow in the middle of America as we normally get. Our clients benefit from having a little exposure to protect against the unanticipated."
Commodities topped returns for stocks, bonds and currencies, the first quarterly outperformance against all asset classes since 2012. New York-based Citigroup and Goldman Sachs Group Inc. say the rally won’t last as supply surpluses start to emerge in everything from sugar to zinc. Investors who poured $1.55 billion into gold funds this year pulled a net $66 million from all raw materials, including base metals and energy, EPFR Global data show.
Last year’s calls by the two U.S. banks coincided with an economic slowdown in China, the world’s biggest consumer of everything from copper to cotton. Chinese gross domestic product is projected to expand 7.3 percent this year, the weakest rate since 1990, according to the median estimate of 53 economists in a Bloomberg survey.
Citigroup, which called the end of the super cycle in November 2012, said in a report yesterday that the "sunset" of rising prices is marked by a breakdown in correlations between raw materials. Analysts led by Ed Morse, the global head of commodities research, said in a March 25 report that investor interest in the asset class could "re-awaken" as some commodities rise and others fall.
"We continue to believe the commodity super cycle is over," Aakash Doshi, a Citigroup Global Markets vice president in New York, said in a telephone interview on March 28. "That doesn’t mean that there is going to be an absence of seasonality and cyclical turns in the asset market. The first quarter was driven a lot by geopolitical and weather events. Commodities will probably return to their more historical norm of behaving more disparately, but just still on a general downward trend."
The large first-quarter gains reflected "transient shocks" for individual markets, Jeffrey Currie, Goldman’s head of commodities research in New York, said in a telephone interview on March 31. "They were basically one-off events. Before I’m going to get excited about commodities, I want to see underlying cyclical strength, and we don’t see that right now."
The Standard & Poor’s GSCI Total Return Index of metals, fuels and farm products advanced 2.9 percent in the first three months of 2014. The MSCI All-Country World Index of equities in 44 markets rose 1.2 percent, including dividends. The Bank of America Merrill Lynch Global Broad Market Index returned 2.2 percent as of March 28. The Bloomberg Dollar Spot Index fell 0.4 percent. The commodity gauge was little changed at 4,969.51 by 1:24 p.m in Singapore today.
About $200 billion was added to worldwide share values in the first quarter. The S&P 500 rose 1.3 percent following the biggest annual rally in 16 years. Utilities and health-care companies led gains.
Prospects that the Federal Reserve could lift its target rate for overnight loans between banks sooner than had been anticipated caused the Treasury yield curve, or the difference between short- and longer-maturity debt, to flatten over the quarter.
The gap in yields between U.S. Treasury five-year notes and 30-year bonds dropped in March to the smallest in four years as economic growth beat estimates. Short- and medium-maturity Treasuries tumbled, with yields rising, after Fed Chair Janet Yellen suggested on March 19 that the central bank may end bond- buying in the fall and raise borrowing costs six months later.
New Zealand’s dollar was the top-performing currency over the quarter as its nation’s central bank raised its key interest rate to become the first from a major developed nation to exit record-low borrowing costs. The kiwi, as New Zealand’s currency is known, in March reached the highest versus the U.S. dollar since August 2011 and gained 5.7 percent in the quarter, relative to 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 major counterparts, ended the month down 0.1 percent and the quarter down 0.4 percent at 1,015.77.
Commodity prices had tripled in the 11 years since 2001, before dropping in 2013 as gold, copper and corn slumped into bear markets and investors pulled a record $43.3 billion from commodity funds tracked by EPFR Global.
Geopolitical events and weather contributed to world food costs posting the biggest gain in 19 months in February, led by sugar, dairy, grain and cooking oils, the Rome-based United Nations’ Food & Agriculture Organization said. Consumers in the U.S., the largest economy, may pay as much as 3.5 percent more for food this year, the Department of Agriculture has forecast.
"If you were shorting a commodity in the last decade, you got your face ripped off," said Peter Sorrentino, a senior portfolio manager who helps manage about $4.7 billion at Huntington Asset Advisors in Cincinnati. "When money came in, it didn’t care, it just came into the entire space. Now, we’re back to a case where you can go long and you can short. Money is being made by really picking winners and losers."
The biggest advance in the quarter was in agriculture, where money managers boosted their bets on higher prices fivefold since December and are now the most-bullish in three years, holding 1.06 million U.S. futures and options contracts, Commodity Futures Trading Commission data show.
Arabica coffee on ICE Futures U.S. in New York jumped 61 percent, the biggest quarterly gain since 1997 and the most among the 24 commodities tracked by the GSCI Spot Index. Southeast Brazil, the largest grower, is having the driest summer since 1972, and a crop disease called leaf rust has cut production by as much as 35 percent in Central America. Arabica may average as much as $2.25 a pound over the next several quarters, Citigroup said. Last year’s average was about $1.27.
Hog futures in Chicago advanced 49 percent, the biggest quarterly gain in 15 years, on mounting concern that a deadly pig virus will tighten pork supplies. Porcine epidemic diarrhea virus, which is deadly to piglets, has been reported in 27 states since April, with more than 5,000 total cases. Pork output in the U.S., the biggest exporter, may drop by the most in three decades this year, Rabobank International estimates.
Wheat reached a 10-month high on March 20, and corn’s 19 percent rally since the end of December marked the first gain in six quarters and pushed the grain into a bull market yesterday.
Some metals also rebounded. Nickel jumped 14 percent, the most in three years, after a ban on ore exports by Indonesia, the biggest producer of the mined metal. Gold, which plunged 28 percent in 2013 as investors lost faith in the metal as a store of value, rose in the first three months of the year by 6.8 percent.
Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, are up 2.4 percent this year, after a 41 percent drop in 2013 that wiped $41.8 billion in value.
Gold’s new-found appeal will be short-lived because the reasons for the rally are temporary, Goldman’s Currie said in a March 20 report. Prices fell the most in three months on March 19, after Yellen said that monetary stimulus will end this year.
Brent crude, the global oil benchmark, fell during the quarter on speculation the Ukraine crisis will not disrupt oil supplies and amid signs that Chinese demand growth is slowing. Futures averaged $107.92 a barrel, down 4.2 percent from a year earlier and the lowest for a first quarter since 2011.
"The temporary fundamentals that were supporting the market in the first quarter have gone," said Kevin Norrish, managing director of commodities research of Barclays Plc. "The cold-weather demand boost in the U.S. has gone, and Chinese import demand has fallen back. The general feeling is that prices are going to move lower, with the low-point for Brent in the low $100s."
China, the world’s second-largest oil consumer, imported 23.05 million tons of crude in February, down from 28.15 million in January, which was the highest on record, customs data show. Brent may slide to about $103 in the second quarter, according to analyst estimates compiled by Bloomberg. That would be the weakest since the end of 2010.
While investors added $688.64 million into U.S.-based exchange-traded funds tracking commodities this year, the gains weren’t across the board, data compiled by Bloomberg show. Broad-based commodity funds saw withdrawals of $536.42 million, at the same time, precious metals saw inflows of $943.81 million, and $130.06 million was added to agriculture funds.
Commodity funds saw inflows in February and March following January outflows of $3.72 billion, according to EPFR Global data. This shows that the "tide has turned for commodity funds, but they still have a rough January to offset," Cameron Brandt, the director of research for the Cambridge, Massachusetts-based firm, said in an e-mail.
Hedge funds are betting the commodities rally has yet to peak. Since the end of 2013, hedge funds more than doubled bullish bets across 18 U.S.-traded commodities to 1.66 million contracts in the week ended March 25. That’s near the highest since the CFTC began tracking the data in June 2006.
"There’s always a surprise around the corner, which is really what makes commodities an interesting place to invest," Catherine Raw, the London-based manager of the BlackRock Commodity Strategies Fund, said in a telephone interview.