Another Commodity Bubble?

Published on: 11:24AM Nov 19, 2009

The chart of the week is the monthly Continuous Commodity Index chart which is an indicator of overall commodity prices.  The index was formed in 1957 as a general benchmarking tool for commodities and is made up of 17 futures markets which are equally weighted (just under 6%) and include; corn, soybeans, wheat, hogs, cattle, crude oil and gold.  As one can tell from the chart below, the commodity index has risen roughly 48% since it bottomed nearly a year ago.  From a chartist’s perspective the appreciation in the last year appears to be healthy.  In a rising market, the downward moves should be faster than the upward moves and that is exactly what we have seen.  Additionally, the market reached the key 33% retracement (from the July 08 to Dec 08 decline) level in the spring, stalled for a few months and then moved higher.  Most recently, the market is challenging the key 50% retracement and appears to be edging through it as well which is bullish.  Now the question arises, what fundamental reasons are behind the increase in commodity prices especially given the state of the US economy?  Well, we do have the influence of a depressed US dollar value policy and building interest in commodities as an asset class but I would argue that there are supply and demand drivers as well.  The three largest corn crops we have ever had have occurred during the last three crop years and the soybean harvest has set new record highs in two of the last four years.  Still, existing corn and soybean supplies are historically limited, at least compared to earlier this decade, due to increases in demand.  And due in a large part to tighter grain supplies, protein and dairy production in the US are decreasing.  Annual beef, pork and chicken output are all forecasted to decline in 2009 which will mark the first time that all three decrease together in the last 38 years.

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