Report: Investors pulling money from commodities
After a decade of sharp growth, investment banks hae begun pulling money out of commodities in favor of other opportunities.
By John O’Connell
After a decade of blistering growth, global commodity prices have generally been declining since 2012, and the financial sector has begun withdrawing its sizable investments from commodities markets, according to a new economic report by Washington, D.C.,-based Worldwatch Institute.
However, the independent research organization’s report finds agricultural goods have fared better than most other commodity classes.
Though commodities traded on public exchanges saw a combined 6 percent decrease in prices during 2012, agriculture — helped by limited supplies due to a severe drought — energy and precious metals were the exceptions, making price gains, according to the report.
“If the drought hadn’t hit, I think agricultural prices would have been maintained or in line with other commodities and dropped a little bit,” Konold said, acknowledging population growth and increasing variability in weather could help buffer agriculture from future sharp declines.
Prior to 2002, Konold explained, commodities were demanded primarily by developed nations, and prices were in a gradual decline. Konold said that’s when developing economies in countries such as China, Brazil and Russia began entering the fray, with insufficient capital expenditures in equipment and production capacity constraining supply.
Commodity prices surged by an average of 9.5 percent per year over the next decade and investment poured in, a phenomena the report describes as the Commodity Supercycle. The exception to the rapid growth was 2008-2009, when the start of the recession hurt prices of the major commodity classes, except precious metals.
Global investment in commodities, which totaled $10 billion at the start of the 2000s, increased to $460 billion by the end of 2012.
Konold believes demand for commodities cooled in 2012 because the largest developing nation, China, took steps to curb inflation after years of record-setting growth largely driven by a construction boom.
Furthermore, large investment banks that turned to commodities for safe harbor during the recession have begun pulling out their money to balance their portfolios as the economy has improved. This year, through the end of April, commodities lost $63 billion in investment.
“So far in 2013, we’re seeing a continued slow-down of commodity prices and a continued exodus of finance,” Konold said. “It will be interesting to watch if that reduction continues and at what pace. That will give us an idea of if it’s a full-on mass exodus or if prices will stable out, and this is the modern commodities market.”
University of Idaho Extension economist Paul Patterson noted the Chinese “can’t produce enough of their own food, so they’re still the majority player in agricultural commodities.”
Prices of major agricultural commodities are declining this year, and economists were predicting declines in 2012, prior to the drought. Rather than a broader trend, Patterson believes the fundamentals of supply and demand have affected agricultural prices.
Patterson agrees investment banks will continue pulling funding from agriculture and other commodity classes to invest in stocks and other options in an improving economy.
But he insists that’s not necessarily a bad trend, provided that the money is taken out gradually so the market has time to adjust. Patterson believes over-investment in commodities tended to drive “high prices higher and low prices lower,” and the volatility increased market risk.