Here’s how commodities fared in the first half.
Some people might consider this development a flaming contrarian buy signal for commodities:
“Goldman Sachs Group Inc., the dominant commodities trader on Wall Street, is reviewing the direction of the business after a slump in the first half of the year,” Bloomberg reported, citing “people with knowledge of the matter.”
Will Goldman exit commodities trading?
In 2009, Goldman’s commodities trading revenues reached $3.4 billion. By 2016, it was down to $1.1 billion, “according to one of the people” cited by Bloomberg. In April, Goldman blamed its lousy first-quarter results in part on “significantly lower” net revenue from commodities trading. It pointed out at the time that client volumes suffered as crude oil volatility averaged the lowest level in over than two years.
Bloomberg added, citing “the people”:
While the bank flagged the poor results for the first quarter — without giving specific numbers — the weakness has continued and the unit’s start to the year has been the worst in more than a decade….
On Friday, Barron’s reported that Wells Fargo downgraded the stocks of three US oil field services companies because the analysts expected a “prolonged stagnation” in oil prices due to an “unexpected glut” as US shale oil production surged.
“Unexpected?” Here’s a chart of the oil glut in the US, in terms of crude oil and petroleum products in storage. This glut has been going on for over two years:
As a consequence, prices of crude oil and petroleum products keep getting hammered this year. During the first half of 2017, prices for WTI fell 12% and for Brent 14%.
So Goldman is licking its wounds from the market and is pondering how to proceed. According to Bloomberg, “The commodities division was one of the topics of discussion at a board meeting held in London late last month.” But no decision has been reached whether or not to exit the commodities trading business.
Other banks have already reached a decision: Morgan Stanley, JPMorgan Chase, Barclays, and Deutsche Bank have either curtailed or exited commodities trading, “amid falling revenue and tougher regulation.”
But crude oil and petroleum products are not the only commodities at play. And this is where it gets complicated. The chart below shows Standard and Poor’s Goldman Sachs Commodity Index (GSCI) going back to 2007. For 2017 though July 7, it’s down 10.5%. And longer-term it looks dismal:
But beneath the surface, there’s some real-world chaos. Here are the price changes for the different component groups, so far this year:
- All the energy components are down.
- All livestock components are up, with lean hogs up 43%!
- Agriculture components are a mixed bag, with sugar having plunged 33% and Chicago wheat having soared 26%.
- Industrial metals were up except for nickel.
- Gold and silver were up, but silver just a smidgen.
This chart via the EIA shows just how far commodities diverged in the first half:
Gasoline pricing tends to be seasonal, with prices rising ahead of the driving season – and this seasonality “likely contributed to less of a decline in prices compared with crude oil and other petroleum products,” the EIA said. But despite the seasonality, it was still a decline.
Cocoa prices fell 12%. On a side note, I’m not expecting my favorite 86%-cocoa chocolate to get cheaper; it seems the price of chocolate only goes up, or at best doesn’t change.
So some people might consider Goldman’s contemplated exit from commodities trading – that it is finally throwing in the towel – as a contrarian signal that the multi-year commodities bust is over and that it is time to jump in with both feet. But the divergence of the different commodities shows that this is not so clear-cut – though that divergence certainly doesn’t show up in the overall commodity index.
And it’s about time that deposit-taking banks that are deemed too-big-too-fail and are backed by taxpayers get out of the commodities betting business.
The Fed has been tightening by raising rates and it has announced the unwinding of QE, and financial conditions should be tightening in response, and the Fed wants them to tighten, but the opposite has happened. Read… Stock and Bond Markets Blow Off Fed, Fed Gets Frustrated
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This jump in price on pork, is it seen on the international market too or is it simply a domestic jump ? I mean, are the Chinese buying up the bacon ?
Yes, China is buying the bacon. They bought Swift a pork meat packer and the pork is probably getting mostly exported.
The Chinese bought Smithfield Foods Pork Division. Swift bought Smithfield Foods Beef Division a few years earlier.
The Chinese now own 1/4 of pig production.
spent some time finding a causative factor in the increase in lean hog future prices . Although exports to china have increased significantly our main hog export destination is mexico . According to this chart, exports to all countries have remained somewhat static. Bottom line : US pork production is at all time highs and demand both domestic and foreign is strong . Pork is a cheaper substitute for beef. But my cursory review doesn’t
warrant the large increase in future prices. You can fill in the blanks there.
Right. I can’t eat Smithfield anything anymore. Whatever the Chinese are doing, their products go thru me like a …well you know. At lest in my store, Smithfield is NOT getting the prices that they did when American owned, so may be I am not the only one that gets more than one chance to read from the morning reaction.
Swift is still superior.
Some of the price increased have to do with the Midwest drought. Just think what the prices will be if ol’yeller blows.
Yep the Chinese don’t trust their own food safety so food produce in the US goes for a premium price.
I agree Smithfield products aren’t what they used to be. Sodium Chloride content seems excessive, for starters. Must be it’s been reconfigured for the new target market.
As far as energy is concerned, GS rarely if ever has a losing day AFAIK.
Read the news, wheat crop is smallest planting in many years, soybean is largest. Again, China bought umploads(technical term) last year thus response was to plant more (most likely a mistake, we’ll see)
It’s very nice of US taxpayer to subsidize AG products destined for the Chinese dinner table, TYVM!
Swine is up 35.4% on Asian markets since January. Poultry is up 29.5%.
Swine still has a very long way to go to hit its 2014 peaks but poultry is at a 30-years high and still going up.
To stay in Asia, rice has rebounded somewhat starting April but it’s still far from the 2009-2012 peak, palm oil has lost 14% since January and shrimp prices have been stable since January.
Don’t go near swine if you are wearing pearls.
Boneless, skinless chicken breast is $1.59 a pound here in Florida. Gee, may be I should see some on ebay to China.
Look at the price of Jamon Iberico from Spain – the Chinese have made it astronomical.
That has always been expensive. Price have remained stable at $104 a pound and it is only stocked at Christmas at my local store. My daughter and I always go in and get samples…and then do not buy . LOL But we get a minute or 2 of savory bliss.
The article you posted said the Chinese pay more than Americans.
And premium quality fruits and nuts from the west coast are exported to China’s wealthiest communities…we in the U.S. get the remainder at higher prices. Reminds me of the same experience when Japan was king of the world in the late 1980’s.
In all fairness the Japanese (and undoubtedly the Chinese also) have a lot of holidays and rituals based around fruits and nuts. There’s a great value placed on perfect cherries, perfect peaches, and so on. The regular day-to-day stuff is competitively priced at the Asian markets here I go to. Yeah that perfect peach might cost $100, but I don’t care.
“fruits and nuts from the west coast are exported to China’s wealthiest communities”
One could only wish
I don’t know if commodities are a buy, but i do know that the 88% Cocoa is something i eat everyday..in fact i am eating it right this minute! I get the endangered species chocolate bar with the picture of the Panther. And you know what amazes me? there are only 10 grams of sugar in the entire bar! and it gives my brain a rosy outlook when i eat it. Oil it seems everywhere i read no one likes it..it could be the time? But will demand for oil drop as transportation switches to clean energy? could it become obsolete? Those advanced civilizations don’t use oil to power there ships..it’s just how long till that happens? Probably a long time..I think I will buy some options on the oil stocks next week..its a sign!
I been looking at some option trades on the SCO Bloomberg oil index. Also the oil stocks are extended to the downside.
Got you beat. 100% cacao butter chunks from Whole Foods. $11 for a half-pound bag but a bag will last me a while. Got a bag of cacao nibs too, that was $7-odd but again, will last me a while.
Notice that two of the biggest traded commodities never even made the list:
1. Iron Ore
The price of iron ore sunk like a rock this year and has recovered somewhat. Prices are expected to fall below A$50 a tonne later this year. Hit over $95 a tonne, then fell to around $50, and is now around $60.
Coal – I really don’t know what it has done since the start of the year. Both met coal and thermal coal zoomed up in price after the storms hit Queensland earlier this year, but have fallen by around 20% or since then.
Coal prices are going down sooner or later since many countries are trying to go “Green.” But might have seasonal rises in countries were is still used for heating.
Construction uses tons of Iron Ore so every time a big construction boom happens Iron Ore prices will rise, the contrary also happens. Since in the current economy there aren’t building as much as they did before, Iron Ore prices are going down.
Rare metals are a sure investment for the moment since they are using more and more into cell phones and other electronics. But some countries, like Japan, are trying to recycle cell phones metals for that same reason. If it will work or not depends on price. If rare metals get too expensive then recycling will seem like a viable option.
When you say “rare metals” are you referring to ” rare earths” or silver and gold?
There is some overlap between rare earth and rare metals.
The Rare Earth classification encompasses all the Rare Earth Elements, the term also includes the 15 metals in the Actinide group of the periodic table. Rare Metals are a loosely defined group of resources including tantalum, niobium and the platinum group of metals, which are genuinely rare and valuable, but not rare earth elements.
The Dona Thank you for that clarification
Prices of commodities are not independent of one another. In the system of modern industrial agriculture, food products are a modified form of petroleum. A huge amount of energy is required to produce a crop. This includes the diesel fuel of equipment, as well as the embodied energy of that equipment (i.e., the energy required to mine and smelt the ores, fabricate the machines, and deliver them). On irrigated farms, irrigation is the largest requirement for energy. Fertilizers and pesticides are also petroleum products; for example, nitrogen fertilizers are made from natural gas and atmospheric nitrogen, with the gas being both energy source and feedstock.
The upshot is that to produce 100 calories of food at the farm gate requires between 20 and 200 calories of fossil fuel. That’s just at the farm gate. That product has to be shipped, processed, packaged, warehoused, distributed, refrigerated, and stocked to get it to where the end user can drive her SUV to the store to fetch it home. By the time the food is on the fork, it requires more than 100 calories of fossil fuel to make 100 calories of food. In other words, we eat petroleum, one step removed.
I go out of my way to make my farm energy efficient. For example, my irrigation water is pumped by off-the-grid photovoltaic panels driving a DC pump. Even so, I use 18 calories of fossil fuel to produce 100 calories of food (at the farm gate), and that’s with an energy dense product (olive oil).
The low price of petroleum is keeping a lid on the price of agricultural commodities at present. But we can expect a jump in ag commodities (with a lag) when petroleum comes back up.
Interesting comment and facts,goes to show what would happen to consumer inflation if the price of oil would rise substantially after all that money printing. Fire,meet Gasoline!
I know you farmers are sophisticated when it comes to high-tech equipment and gadgets. Do you have specialized software that allows you to track the caloric consumption and output of your farm, say over a 12-month period?
I imagine that you’d put in your fuel and electricity usage along with the farm’s production in a detailed manner. The software might then also allow you to do a what-if analysis to see where you can save energy etc.
Is that sort of program available?
” I know you farmers are sophisticated when it comes to high-tech equipment and gadgets ”
Errr .. having lived among the family run and Agra – Business farming for several years both in the MW and NE suffice it to say Old Farmer is in a very distinct minority with most family farms still doing things like it was 1957 rather than 2017
Agra – Business though ? Now that a horse of an entirely different color . But even with them efficiency despite the technology available aint at the top of their priority list either .
Fact ; The most efficient farmers in production over acre as well as overall energy usage etc are …
…The old school Mennonite , Quaker and Amish farmers .
So give credit where credit is due to Old Farmer . He’s a rare breed indeed .
One cannot help but admire the efficiency and gentle ecological footprint of the Amish and Mennonite farmers. However, to farm with draft animals requires that a third of your land be in hay and pasture. Where farmland is $25,000 plus per acre, as it is here, and where income from cash crops is high, to return to farming with mules does not make economic sense. Moreover, a lot of modern farm technology (e.g. pistachio harvesters, tomato harvesters) depends on a complex mix of mechanics, hydraulics, pneumatics, optical sensors, computers, etc. which are not readily modified to an animal energy source.
That said, there is some logic to forsaking some extreme technology in favor of more labor intensive approaches. In doing so you create jobs for otherwise unemployed people, and the social and economic benefits might justify that.
I’m not aware of any software that tracks farm energy in that way. For me the most difficult part of the calculation for my farm was embodied energy; for example, how much energy was required to fabricate and deliver a tractor, and over how much production is that cost to be allocated before the tractor is used up. Because I live on the farm, which is 8 miles from town, I drive an extra 8-10,000 miles a year just taking care of daily life, which I could do on a bicycle if I lived in town. That is not included in my energy calculation, and yet it is indirectly an energy cost of farming.
Here in the Sacramento valley, irrigation is the biggest energy expense, and commodity farms readily switch back and forth between electric pumps and diesel pumps depending on the relative costs of diesel and electricity.
A comment on this point: “The low price of petroleum is keeping a lid on the price of agricultural commodities at present. But we can expect a jump in ag commodities (with a lag) when petroleum comes back up.”
Ain’t gona happen anytime soon. I have for weeks been tuning in on u-tube to ‘Dutchsinse’. The USGS hates him, but he has a 80% plus accuracy on earthquake predictions and intensity…80% plus. Since the quakes off Vancouver Island have been ‘flowing’ down to Yellowstone and Colorado and then to Oklahoma, he has been doing google earth 3-D and gliding down and scanning the terrain to see what is around the quake areas. My mouth dropped open to see the thousands and thousands upon thousands of fracking wells like a squeegee sweeping from California, across the Rockys down to Oklahoma and up thru the Midwest. I had no idea the extent, I thought may be two or three thousand..not even close. Some places there are more fracking wells then telephone poles, including Colorado.
Want to be dumbfounded, check him out. And what really concerns me is not that we will have a petroleum shortage but potable WATER shortage from all this fracking going literally unregulated by a central program.
Is there a particular video link that talks about what you describe in regard to the wave of fracking earthquakes from Vancouver Island to Oklahoma?
Meme – http://www.geysers.com/visit.aspx I visited here back in 05 or so, at the time they had an engineer, a retired old guy with great stories, who’d take you on a tour of the whole facility, driving you around in a truck etc., I was the only visitor that day so I have a personal one on one tour, it was great. But one thing that stays with me, besides the insane pressures and temperatures involved, is that they had a problem with earthquakes until they started pumping water back into the ground to replace what they took out. Yikes!
That whole area is well worth visiting if you’re passing through. Petrified wood, the site of the Bear Flag Rebellion (which wasn’t just gringos it was a mix of Californians tired of Spanish rule) and just neat stuff in general.
Old Farmer: Thanks for a very informative comment. Your comment gives me a completely new view of the economics of farming, and oil.
“That product has to be shipped, processed, packaged, warehoused, distributed, refrigerated, and stocked to get it to where the end user can drive her SUV to the store to fetch it home. By the time the food is on the fork, it requires more than 100 calories of fossil fuel to make 100 calories of food.”
Have a vegetable garden or fruit trees at your house – eliminate those costs and get better, healthier, and fresher food.
Right now it is nice to be able to walk out the door, down the steps, and pick fresh mandarins everyday. Still hundreds on the trees!
I’m surprised everyone hasn’t read this by now.
I can go on about cacao nibs and hazel nuts and mackeral bought cheap at the local Japanese market but the reality is that we’re using 10 calories of oil to produce/package/deliver 1 calorie of food.
You are spot on and this is difficult to explain to friends who believe we will be living in a 100% green economy in 10 years just because they recently read an article about Tesla. I’m a commodity chemical trader/supplier who buys and then sells raw materials to fertilizer manufacturers. I’m likely forgetting some, but here is a short list of some of the energy consumption factors when we import product from China (which very high volumes of chemicals used in the U.S. are) – up until it reaches the farmer’s field:
1) Product produced at plant in China (Involving a lot of energy, water and petrochemicals derived from oil and/or mining of minerals). Packaged in plastic bags (usually 800 bags or 20 bulk bags) also derived from petrochemicals and delivered to plant.
2) Product loaded onto 20 ft container that was delivered by steamship line, then hauled to the port of China and loaded onto vessel (both hauld consume fuel)
3) Product travels via vessel from China to U.S. port. Once it arrives to port it is transported via truck or rail (whole trip involves lots of fuel). The product may be shipped into warehouse first then to fertilizer customer adding even more fuel.
4) Fertilizer manufacturer uses plenty of energy, fuel and water to produce finished fertilizer – then packaged into new bags or packaging that also had to be produced and delivered to their facility.
5) Finished product is shipped to local distributor or co-op (more freight/fuel)
6) Fertilizer is delivered to or picked up by farmers (more freight/fuel)
7) Fertilizer is spread on fields (more fuel)
Many additional steps obviously follow to get food onto the shelf…
I’m probably missing a handful of factors but point being there is a lot more input to get food onto shelves then people realize, and the use of oil / petrochemicals will not be going away anytime soon. Ever since the price of oil collapsed most pricing has been getting beat down and raw material manufacturers are trying to think of any reason to pass along increases -but not having much luck.
The beauty of the Hershey business. When cocoa prices decline their prices don’t. When cocoa prices rise their prices rise more. It’s essentially a business that will last forever especially given the ownership structure.
Anecdotal: my circle who are not rich are all eating more pork (usually BBQ) instead of absurdly priced beef.
Here chuck steak is 15 $ C a kilo (2.2 lb) so over 6 a lb.
Boneless loins of pork can always be bought for 5-6 a kilo.
Cutting chops is not much more difficult than slicing bread, but is still more than some folks want to do because right to the loins will be pork roast cut from one for 9 a kilo.
Better, tender beef cuts range from to 19 to 30 plus (strip loin, T-bone etc,)
But when I saw prime rib marked down by 50% (to 15 a K) I grabbed it (there was only one) because when you need a nice steak you are going to pay up.
Maybe with the oil bust more Alberta ranchers will be able to afford to hire help. Apparently the former’s high wages and also sometime drought are partly responsible for the squeeze on beef.
Well, if we are sitting on the edge of a recession as much of the data and history would suggest, AND with all the unserviceable debts that has been documented here, I would expect that in the end that all asset values will have collapsed including commodities. Which would mean that they will go a lot lower before they again rise.
So the questions here are; “How soon will this happen and is there another bounce up before it does?”
And/Or Can/will the government or the FED be able to significantly ameliorate the down turn again and pump asset prices, including commodities to new heights? Can they actually finally create an inflationary environment?
How Lucky do you feel?
When the central banks started quantitative easing (printing), many including myself believed commodities (i.e. real goods) would go through the roof. Commodities would be THE way to hedge against money dilution. Eventually that will be true but what we missed was that the easy money results in marginal producers staying around producing commodity gluts.
Indeed!! The idea that QE, ZIRP, excess liquidity, and asset bubbles could cause malinvestment and then gluts, and then keep marginal producers alive and producing despite the gluts, and thus cause prices to fall for years surprised many. Even the central banks didn’t think about that.
I think the oil glut will last until the big money finally sours on investing in shale. That was happening in 2016, and then it reversed. About $57 billion of new money (chasing yield) has entered the US shale sector since then, and we start all over again.
“When the central banks started quantitative easing (printing)”
QE was a glorified asset swap program, not money printing.
“Commodities would be THE way to hedge against money dilution.”
Don’t forget that most commodities were in MASSIVE BUBBLES, so even if money were being diluted in the manner you speak of (printing– which it wasn’t), there was a huge offsetting factor there.
The price of wheat hovered between $2-4 for the late 90s and 2000s, until about 2007 when it went parabolic eventually reaching $12 in 2008– a roughly 400% gain in a very short period of time.
The price of copper went from about $1 to $4 in the same time period.
Oil went from $20-40 to $150 at its peak.
Gold went from $250 in 2000 to about $1900 at its high.
All of this happened in a short stretch of years, without any fundamental justification.
I hear Janet at the Fed is waffling and we’re almost done with easing. This is what I expected despite all the ‘noise’ from central banks about a rise in rates.
It’s just noise.
This might be, as the article suggests an o.k time to invest some money in commodities as cheap money to stimulate the markets is here to stay. America has, as this site has suggested, Japan. I see no reason why rates can’t stay in a low range for the next ten years.
I give WOLF and JEST credit for eating %88 chocolate.
I usually enjoy Green and Black’s organic %70 and reluctantly sometimes eat the Valrhona %85.
While the FED can manipulate stock and bond prices ,it is much harder for them to manipulate commodity prices because excess commodities have to stored (and will go eventually go bad in the example of agricultural commodities.
Oil is classic example of this.As supply keeps on exceeding supply, the excess oil has to be stored either in above ground storage facilities,salt wells similar to those in Louisiana or in floating storage(tankers).As storage facilities approach their capacity,costs of storage can move up dramatically while the price of spot oil can move down considerably.
Theoretically when this happens oil prices could easily fall to their marginal cost of production as long as supply keeps on exceeding demand.This marginal cost of production is around $7/barrel in Saudi Arabia and is higher in other parts of the world.This almost happened last year.and could happen again next winter/spring.
Good news from one corner of the “financial counter culture”:
We have cattle on our place and an old cow that was in decline was fed out and butchered for the family’s food.
One has real, down-to-earth options when one owns the livestock per se, rather than just placing bets on cattle prices.
We eat or sell or reproduce our “real” stock, as appropriate to our lives.
To the some of the “paper” boys, we are just “marginal producers” who upset their bets.
$CRB long term view.
1) Low slog channel tilting down created by the :
1980 top & 1996 top and the bottom between them.
It pack a lot of energy. Huge.
2) A more recent channel, tilting sharply down from the tops in 2012 and 2013 and the bottom between them in 2012.
3) Those two channels have collided, recently and that create a lot of
volatility. The chart looks crazy to some people, or manipulated by the crooked people in Wall St. Wrong ! There is even a channel moving up, since Jan 2016, It add to the confusion.
4) Unfortunately to many players, x2 channels tilting down, add negative force to, when they merge.
They behave like x2 vectors tilting down, colliding with
each other. On the Y axis they add power. not subtract. On the X axis they also add to each other, making the process longer.
5) From the 2008 peak, $CRB collapse, still in 2008 and was stopped by the older channel.
6) Beyond the coming turbulence, $CRB might breach the support line(the lower line)
of the older channel , because of the increased negative momentum, and form a symmetrical zigzag, starting at the top of 2008.
7) Some very unfortunate times ahead to the commodity producers.
8) Some very unfortunate time to LQD.
As I read it commodity prices should continue to fall short term and medium term. I rationalize that all the lies America tells will escalate thus pushing the U.S. dollar higher. They’ve been trying to jawbone the U.S. dollar lower, it won’t work the U.S. dollar should gain about ten percent over the next two years.
As a Californian, the only commodity I care about is Avocado, otherwise we can’t make California anything :)
Seriously though, those food prices are really reflected in day to day. This July 1st, a bunch of prices went up.
Thank you for a blog that is balanced. Contrarian signal for commodities is rational. As a great investor once said, the best antedote for high prices is…..high prices–since the demand wanes and prices fall. In the case of pork, farmers will breed more hogs to cash in, and their efforts will be rewarded by an eventual correction. Too many financial prognosticators see a trend, and then extrapolate in a linear prediction that prices will continue to trend to an extreme, forgetting the cyclical nature of prices, demand and supply. Thanks for a blog that provokes thought, rather than others who continually fan the flames of negativity
All eyes on the NEW LMBA completely bs “we have this many tons of silver, you just can’t see it but trust us” exchange launches tomorrow the 10th…..If it bombs look to the silver price in Shaghai, a real physically settled exchange…. If the red dragons in London publicly lose the confidence of the world to run and rig the PM price it could lead to fireworks…
Does anyone have any insight into why Silver and Gold have dropped so drastically lately It’s not Dollar strength that’s for sure as the Euro/ USD is at 1.14 I’m wondering if I should buy this dip What say you Wolfstreeters?
America seems to lie about everything whilst talking down the U.S. dollar. As the lies increase the ability to talk down the dollar will be limited so I’m still bearish short term and medium term on commodities. Bullish on a stronger U.S. dollar.
“Talking Down the US dollar” it obviously hasn’t worked if that was their goal The dollar is sure strong in UK EU and here in Turkey where I live A stronger dollar will insure Trumps already unworkable plan to bring jobs back will NEVER happen so I’m thinking a weaker dollar is in the cards DOW 30k anyone?