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PPI of copper ores and grains

|Includes: ELEMENTS MLCX Grains Index Total Return ETN (GRU)
Three months ago we revisited our prediction on the evolution of the PPI of copper and grain, which had been made in 2009. The original prediction limited the level of the copper PPI in 2010:

 
Therefore, copper price will likely not be growing to its peak in April 2008 (491.7), but will likely return to heights around 350.

 
Three months ago we suggested that:

 
In the short-run, the index for copper will NOT be growing too long, at least NOT till the end of 2010.

 
Figure 1 compares the prediction and actual behavior for the producer price index of copper ores relative to the overall PPI. All in all, the prediction was right: by the end of 20009 the price index of copper has reached the level of 350 (375) and even higher in the beginning of 2010 (443 in April). However, it has not reached the 2008 level and started to fall in the second half of 2010. It is very likely that the fall will continue, potentially with a higher volatility, in 2010 and will be stretched into 2011. At a two to four year horizon, the price index for copper ores should return to the pre-2008 level.

 
Figure 1. Evolution of the price index of copper ores relative to the PPI.

 
The price index for grains has been following our predictions as well. In 2009 we wrote:


It is instructive to compare two major spikes in the grains index in 1996 and 2008 relative to the PPI. In order to avoid comparing absolute values, which undergo secular growth, the evolution of the difference between the PPI and the price index of grains normalized to the PPI. Figure 3 presents the normalized curves. The left panel shows that the spike in the grains PPI in July 1996 is similar in relative terms to that observed in 2008. The right panel tests this hypothesis: the spikes are synchronized - for the black line is shifted forward by 142 months. From this comparison, it is likely that decline in the grains index relative to the PPI will extend into the 2010s.


Three months ago we confirmed the prediction that the index of grains would follow the path observed in 1996:

 
The index for grains will continue its decline relative to the PPI. As a consequence, one can expect that the index for food will be also decreasing and this decline will stretch into the 2011

 
Figure 2 illustrates the accuracy of our prediction of the index of grains. The index has been falling relative to the PPI and the trajectory actually repeats that observed 142 months before. We expect the normalized difference to follow up the once observed recovery path. It is interesting that this time the through was not as deep as in 1996. Supposedly, there are more efficient mechanisms counteracting the growth in the price of grains when were in 1996. Judging from Figure 2, the index of grain will not be growing during the next several years.

 

 
Figure 2. Evolution of the difference between the PPI and the price index of grains normalized to the PPI. Upper panel: Comparison of the current curve to that observed 142 months ago. Lower panel: Same as in the upper panel; the most recent period.

 

 
Short term prediction
In the short-run, the index for copper will likely be falling in 2010. The index for grains will continue its slight decline relative to the PPI.

 

 
For details see also our papers:
 1. Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.
 

 
2. Kitov, I., (2009). Apples and oranges: relative growth rate of consumer price indices, MPRA Paper 13587, University Library of Munich, Germany.

 
3. Kitov, I., Kitov, O., (2009). A fair price for motor fuel in the United States, MPRA Paper 15039, University Library of Munich, Germany,

 
4. Kitov, I., Kitov, O., (2009). Sustainable trends in producer price indices, Journal of Applied Research in Finance, v. 1, (in press)

 
5. Kitov, I., Kitov, O., (2009). PPI of durable and nondurable goods: 1985-2016, MPRA Paper 15874, University Library of Munich, Germany

 
6. Kitov, I., (2009). Predicting gold ores price, MPRA Paper 15873, University Library of Munich, Germany

 
7. Kitov, I., (2009). Predicting the price index for jewelry and jewelry products: 2009-2016, MPRA Paper 15875, University Library of Munich, Germany


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