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International Monetary Fund Commodity Projections

The IMF published a report a few days ago on Food and Fuel Prices. Below is an excerpt of their findings from Research Recap by Alcara:

Key points:

  • Both supply and demand factors have contributed to the recent softening in commodity prices, while global growth prospects are somewhat weaker than expected at the time when the June paper was released.
  • In the oil market, easing market conditions have led to a turnaround in prices. OECD consumption has suffered by more than expected (particularly in the U.S.), and the weakening of economic activity has been sharper-than-anticipated, especially in Europe and Japan. The almost 1 million barrel a day increase in OPEC production, mostly from Saudi Arabia, as well as a recovering dollar, have also contributed.
  • In food markets, the price impact of recent temporary supply shocks has waned. A bumper wheat crop this year, together with a substantial reduction of rice and wheat export restrictions, has fostered large price declines in these two grains since May. Moreover, some of the unexpected upturn in corn and soybean prices has been reversed, as the damage from the June floods in the U.S. Midwest was smaller than expected.
  • Part of the price decline reflects the recovery of the dollar: in Euro terms, oil prices have fallen by about a third less than in dollar terms from their July peak. Nevertheless, many of the fundamental forces behind the price surge are still in effect and are likely to keep prices high in the absence of a sharp global downturn.
  • Demand from emerging and developing countries is expected to remain robust. In the oil market, the constraints underpinning the sluggish supply response to high prices should persist amid limited buffers. Moreover, continued strong demand for corn for ethanol use and high fuel and fertilizer costs will also keep up pressure on food prices.

Based upon these findings, our core commodity strategy continues to have fundamental support stronger than most other areas of the investment market. When the markets finally turn the corner, these fundamentals should drive prices in the energy and ag areas higher than the broader market.

Mark