Fields of gold may see yields fall

With the summer’s crop drought triggering a spike in the price of agricultural commodities, Fiona Bond considers the outlook for the months ahead


A maelstrom of Western recession, booming emerging markets, geopolitical pressure and drought gave rise to a summer rally in commodity prices.

Gold shot to a six-month high on the back of renewed fears for inflation, while silver has gained around 16 per cent since mid-August, fuelled by the prospects of further quantitative easing in the United States and hopes of a stronger industrial recovery.

Ross Strachan, commodities economist at Capital Economics, predicts gold will reach the dizzy heights of $2,000 per ounce by the end of the year as investors continue to flock to so-called “safe havens”.

But it’s not just the flight for safety that has continued to rouse investor interest; the growth of emerging economies has thrust industrial and agricultural commodities firmly into the spotlight.

The adoption of Western spending habits across the east has vastly altered the supply and demand dynamics of many commodities; tapping new sources is time-consuming and costly, and supply issues are now capable of sending shockwaves through the markets.

Medium-term price trends tend to be dominated by macroeconomic and financial factors, signalling a downturn on the horizon

You need only look at the incredible surge among the “breakfast commodities”, on the back of the severe drought in the US, to see how significantly supply can impact prices short term.

Corn’s blistering 45 per cent bull run in June and July – the biggest gain seen since the last severe drought of 1988 – propelled it to an all-time high during August, while soybeans hit a new record in September, as the worst drought in half a century ravaged US crops and heightened fears for exports.

Hedge funds scrambled to boost bets on the back of events, driving prices into a bull market with the S&P GSCI Spot Index of 24 raw materials ending August 20 per cent up from a June low.

Agricultural commodities now account for the second largest share of the S&P GSCI after energy, with almost two-thirds of the sector’s weighting represented by corn, soybean and wheat.

ETF Securities analyst Martin Arnold says investors entering the agricultural market tend to be longer-term in their investment horizons, taking into account these aspects.

However, medium-term price trends tend to be dominated by macroeconomic and financial factors – evident in the way grain prices plummeted by 40 per cent in 2008 – signalling a downturn on the horizon.

Prior to the 2008 collapse, against a backdrop of strong economy, robust demand, production shortfalls and soaring oil prices, grain prices had risen sharply. Wheat increased more than threefold between 2007 and 2008, while corn and soybean soared by more 250 per cent over the same period.

Capital Economics’ Mr Strachan forecasts a drop in prices going forward. “The current elevated levels probably reflect the worst possible outcome for US harvests,” he says.

“In the absence of any further adverse weather shocks, we believe that the price of corn, wheat and soybeans will drop back by an average of 15 per cent over the remainder of the year and maintain downward pressure in 2013.”