Rumors of A Commodities 'Supercycle'

by: Tim Iacono

The current issue of The Economist (in addition to the wonderful theme discussed in my post on Sunday), has this report on soaring commodity prices.

Recall that last year, even this usually astute magazine joined the crowded group of naysayers warning of a "commodities bubble", noting that any "commodities supercycle" talk was, well, just talk.

A markedly different tack is taken almost eighteen months later after many commodity prices have risen higher than their peak "bubble" prices of last year. That's not the way "bubbles" work, is it? That would be more like a correction - part of a broader cycle - maybe a "supercycle".

Prices of raw materials are seeing widespread gains as talk of a “supercycle” is in the air. Copper, lead, soyabeans, wheat, cotton, coffee, cocoa and feeder cattle have all registered double-digit percentage gains this year.

Some of these gains can be traced back to the rise in oil prices. The planned substitution of ethanol for petrol encouraged corn planting, which took acreage away from crops like soyabeans and led to a surge in prices. Higher livestock prices can, in turn, be explained by higher grain costs.

But the broad strength of commodity prices may also reflect the appeal of the sector as an “alternative asset”, along with hedge funds and private equity. Ever since the dotcom bubble burst, investors have been keen to diversify away from shares and government bonds. That has led to the launch of a whole series of exchange-traded funds based on commodities, which have made the asset class accessible for a much wider range of investors. The latest example, from Barclays Global Investors, a big asset manager, is a fund based on timber prices. Wall Street has been gearing up to meet demand: a survey by Options Group, a recruitment consultant, found that the hiring rate of commodity traders is up by 33% on last year.

Note that the fund from Barclays referenced above does not invest in timber itself, but rather in shares of 25 leading companies around the world operating in the timber and forestry business.

There are currently only a couple dozen ETFs and mutual funds that invest in commodities themselves and, of the major commodity indexes, only the Rogers Raw Material Fund includes lumber, which does trade on a futures exchange.

The price of lumber seems to have been unduly affected by the credit and housing market tumult that began in earnest in August - a rebound may be in store next year.