Why the Commodities Index Has Returned to the 1990s

October 1, 2015 08:15 PM
china currency 4

By Barry L. Ritholtz 

The chart below is the Bloomberg Commodity Index. It consists of baskets of common commodities, including energy, metals, foodstuffs, softs and precious metals. 

After a fairly flat period in the 1990s, the index leapt upward beginning in the early 2000s. The context explains the jump: High inflation, weak dollar and low interest rates. From 2001 to 2007, the dollar lost 41 percent of its value, and all commodities priced in dollars skyrocketed. At the same time, China began a huge expansion of its infrastructure, transportation, housing and manufacturing sectors. The BCOM index moved from around 90 to almost 240.

You know the rest of the story: Inflation is nowhere to be found, and the Federal Open Market Committee is concerned about deflation. The dollar is at multiyear highs against just about any other currency. Commodity prices have suffered as a result.

Bloomberg Commodity Index, 1991 to present


Oil prices have been cut almost in half compared with a year ago, to $45 from $87. They are down more than 60 percent from the peak of about $150 barrel of the mid-2000s. The U.S. consumed 6.98 billion barrels in 2014, according to the U.S. Energy Information Administration. The silver lining is that current prices reflect a $42 per barrel savings from a year ago. If it holds, it could put almost $300 billion back in consumers' pockets. We have seen some early signs of that money being spent in recent retail sales.

But as the commodity index shows, this isn’t just about oil; just about all commodities have fallen across the board.

There are several reasons for the price contraction: Along with the strong dollar, excess supply, thanks to North American fracking, also is a contributor. Natural gas was trading Thursday morning at $2.488 per million British thermal units, and oil has cratered, too.

We shouldn't underestimate the impact of a slowing China on commodity prices. It has been on a huge building binge, a government planned overconsumption on an epic scale. When China, the world's biggest consumer of commodities, slows, commodity producers feel the pain.

According to data assembled by visual capitalist, China consumes 54 percent of the world’s aluminum production, 48 percent of all copper, 50 percent of nickel, 45 percent of steel and 60 percent of concrete. It has “consumed more concrete in the last three years than the United States did in all of the 20th century.”

In terms of energy, China uses 49 percent of the world’s coal, 13 percent of the uranium and 12 percent of oil. It’s the same with food: 30 percent of the world’s rice, 22 percent of its corn and 17 percent of wheat.

China was one of the big reasons for the commodity surge in the 2000s. The country's growth has now been cut in half, and that's why prices are now back to the levels of the 1990s.

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Spell Check

Mark C. Daggy
Humboldt, IA
10/4/2015 03:30 PM

  The old "pump it and dump it" scheme is always alive and well in America and even China. Those wanting to borrow their way into wealth, rather than earn it over many decades is the problem. As W.C. Fields proclaimed, "There is a sucker born everyday." No one makes farmers borrow money and expanding under ones own finances may take longer but works just fine. Waiting patiently for the big borrowers to collapse....is a plan that works great.....to pickup equipment for pennies on the dollar. Maybe doing things the old fashion way....with a great deal of sweat and long hours will avoid the "pump it and dump it" schemes. If interest rates returned to 10% to 12%, it would eliminate the sick deer in the herd, so to speak....just like in the 1980s.

Western, NE
10/3/2015 10:01 AM

  Prior to Greenspan, we always had periods of contraction in our economy. Lyndon Johnson's "Great Society" started to hose that. I for one think we need a couple of years of deflation to rein in costs. Areas of the economy always undergo that, just not the whole economy. I don't mind $4.00 wheat if we have 75 cent diesel and $110 32-0-0. And new tractors costing $80k. We have $4 wheat, but none of the other costs have dropped. Cheap interest has caused horrendous problems in the economy--ones that will not correct themselves. Thanks Wall Street!! Ya turdknockers!!

Dave Burke
Smithfield, PA
10/3/2015 07:04 AM

  You can thank the Elites of the Central Banking Cabal, worldwide. Federal Reserve Ponzi scheme your Government has allowed since 1913 is about to blow up in their face. Rothschild Family secrets, interesting read and eye opening.


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