Only a month ago, sizzling commodities prices seemed destined to soar higher with record-breaking rallies in crude oil and corn. But now the boom appears to be taking a breather, cooled by a weakening economy and a milder Mother Nature.
In just seven trading days, oil has lost more than $20 a barrel, or 14 percent, as record energy prices eat into demand. Meanwhile, corn has fallen 21 percent, soybeans 12 percent and wheat 8 percent since the start of the month, as ideal farming weather boosts Midwest crops battered by recent floods. Even gold, a bellwether of the commodities boom, has lost ground, falling 6 percent in the last week.
Commodities turned even lower Wednesday in the second straight sell-off, with silver, copper and wheat all trading lower.
So is the commodities bubble about to burst?
Analysts aren’t ready to go that far, noting that such statements in the past proved premature. But most concede that the steep drops in energy, grains and precious metals at least signal a slowdown in the frenetic futures markets — possibly providing much-needed relief for consumers struggling to cope with soaring prices at the pump and in the grocery aisle.
“Commodities in general have cooled a bit, “ said Darin Newsom, analyst with DTN in Omaha. “We had such an enormous run, and big rallies lead to corrections. The great question is whether it’s long term or short term.”
He noted that the seemingly relentless drive in commodities — crude oil and corn have both doubled in the past year — was built largely on robust demand for raw materials, especially in fast-growing economies in China and the Middle East. A weakening U.S. greenback fed that demand by making dollar-denominated commodities cheaper to overseas buyers.
But with record energy prices and soaring costs for other commodities, “a lot of that demand has died out,” Newsom said.
The turnaround is on full display in the once white-hot grains market, which shot to record-highs in June after devastating floods swallowed chunks of the Midwest and wiped out corn and soybean fields.
Corn prices neared an unprecedented $8 a bushel, forcing the temporary closure of several ethanol plants that use the grain as their main feed stock. Livestock owners also suffered, as the rocketing cost of corn-based animal feed made raising hogs and other animals unprofitable.
“A lot of livestock owners went out of business. I know because they just stopped calling me,” said Jason Ward, an analyst at Northstar Commodity in Minneapolis who advises farmers and ranchers on the grain outlook.
But things brightened earlier this month as a burst of warm, dry weather blanketed flood-stricken areas, drying out waterlogged crops and boosting hopes of a decent — maybe even good — harvest. The optimism has helped push corn prices down more than $2 a bushel, low enough for some end users start buying again.
One of them, VeraSun Energy Corp., said Tuesday it will go ahead with the delayed launch of its ethanol plant in Hankinson, N.D., because of the improving business conditions.
Beyond the bearish weather, a shift in investor sentiment has also weighed on commodities prices.
In recent weeks, analysts say, large funds have begun pulling money out of commodities as slowing economic growth has led to dropoffs in buying of everything from copper used in industrial wiring to steel used in skyscrapers and airplanes.
Tighter government scrutiny on commodities trading — including a congressional proposal that would ban pension funds from futures trading — has also rattled investors and prodded them to cash in long positions ahead of any restrictions.
“We’re in a commodities liquidation mode,” said Richard Feltes, senior vice president and director of commodities research for MF Global in Chicago. “People are heading to the sidelines, basically saying ’let’s see how this turmoil is going to shake out.”’
One beneficiary of the pullback, at least for the moment, has been Wall Street, which has seen a jump in investor inflows as traders shift funds out of futures and back into battered equities.
Consumers could also gain as easing crude prices begin to lessen pain at the pump. Prices have already fallen below $4 a gallon in some parts of the U.S., and prices for meat, dairy and other food products could follow if the trend continues.
Still, analysts say several scenarios could send prices higher again. For starters, any disruption in oil supplies, say, from a burst of violence in the Middle East or a major hurricane hitting the U.S. Gulf Coast — would rally markets.
Grain prices could shoot up again if crops produce a small yield due to flood damage or an early Midwest frost. And more weakness in the dollar or further calamity in the U.S. banking sector could boost safe-haven buying and send gold prices back toward $1,000 an ounce.
For those reasons, many in the financial world are wary of saying whether or not the commodities bull-run is really over.
“That’s the $64,000 question at this point,” said Tom Pawlicki, commodities analyst with MF Global Research in Chicago. “There’s a big segment that has been burned too many times calling tops on this market, so they’re a little hesitant to do it again.”