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Economy in Brief


Commodity Prices Firm After An Earlier Easing
by Tom Moeller August 11, 2010

Last week, Haver's Louise Curley focused on the sustained strength in wheat prices (+45.6% y/y). The broader product trend shows that most industrial commodity prices recently have either recovered or stabilized after earlier weakness. Copper prices, in fact, have reached a new high (+56% y/y) while aluminum (12.4 y/y) and zinc (8.7% y/y) prices also have strengthened. Steel scrap prices are a notable exception to the recent firming trend though they're still up by half y/y. Finally, corn (3.9% y/y) and soybean (-6.4% y/y) prices recently are up. Steel scrap & zinc prices also have risen from their spring lows. The price of gold is a favorite barometer, for some, of pending inflationary trends. Generally, it's had a mediocre correlation with actual price trends but a better one with market liquidity and risk. But here too there's strength. Gold's price of $1,187 per ounce is up 23.6% y/y and it's nearly five times its level ten years ago.

In the agriculture sector, prices also are up. Wheat prices, indeed, have been notably strong due to severe weather patterns worldwide and, thus, limited supplies. That kept stockpiling restrained. For soybeans, weather factors also raised prices though corn prices moved sideways. Finally, the developing demand for bio-fuel lent further support to grain prices generally. Also in the food area, economic recovery raised hog prices by 30.5% since the recession's end and beef prices by 16.0%. Lastly, textile & fiber prices doubled their 2009 low with increased product demand.

This price recovery follows weakness which accompanied the world-wide economic slowdown early this year. Weakness was most evident in the industrial sector where prices for aluminum, copper, scrap steel and zinc each fell up to one-third from their spring peaks. Lumber and wood prices were even weaker with depressed activity in the housing sector. Meat prices also fell roughly 10%. Conversely, and also in the food complex, wheat and soybean prices were rising to new highs but corn prices fell slightly. Notably divergent from all of these trends has been the price of crude oil. After doubling from the recession low of roughly $40 for a barrel of West Texas Crude oil, prices have varied in a range from $71 to $85 since January.

How much of an impact will commodity prices have on broader inflationary trends? The answer probably is not much, with the exception of oil. As an indicator of product demand, commodity prices have a strong correlation.But the flow-through to final product prices is overwhelmed by development, packaging and distribution costs. At the current time commodity prices suggest that economic recoveries around the world are developing. Fears of pending recession seem overblown, but the likelihood of a re-emergence of broad-based inflationary pressure is low.

The price data used in this report can be found in Haver's WEEKLY and USECON databases.

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