Commodity prices slide to lowest level in a generation

A worker welds the copper product manufactured by Jiangxi Copper Corporation in Dexing, Jiangxi province, in March, 2014. [Photo/China Daily]

Lower fuel prices are compounding the longest commodity slump in a generation.

Because energy accounts for as much as half the cost to produce food and metals, all sorts of commodities will keep dropping, according to Societe Generale SA and Citigroup Inc. With inventories ample and slowing economies eroding demand, cheaper oil lowers the price floor for mining companies and farmers to remain profitable.

Corn may drop another 3 percent, cotton 6.5 percent and gold as much as 5 percent, SocGen estimates.

Costs are falling as surpluses emerge in copper and sugar and as the economy slows in China, the top consumer of energy, metals, pork and soybeans.

The Bloomberg Commodity Index of 22 items is heading for a fourth straight annual drop, the longest slump since its inception in 1991.

Brent crude, gasoline and heating oil are the biggest losers as an increase in drilling in the United States has led to a price war with producers in OPEC.

"There's been a structural change in oil, and there's more to come," said Michael Haigh, the head of commodities research at SocGen.

"This will also ripple through other commodity markets, in some cases directly, and others indirectly."

Brent crude, the international benchmark, has tumbled 42 percent since the end of June to $65.51 a barrel as US output jumped to a three-decade high. The price on Tuesday touched $65.33, the lowest since September 2009.

The Bloomberg Commodity Index fell 12 percent this year. The MSCI All-Country World Index of equities gained 3.1 percent, while the Bloomberg Dollar Spot Index climbed 9.8 percent.

Falling oil prices will be a boon to consumers who can expect to pay less for food, Citigroup's Aakash Doshi said in a Dec 3 report. About 45 percent of the operating expenses of growing and harvesting rice comes from inputs such as fuels, lubricants, electricity and fertilizer, according to a US Energy Information Administration analysis of US Department of Agriculture data.

Energy accounts for about 54 percent of costs of corn and wheat.

Energy makes up 30 to 40 percent of operating costs for mining, according to Citigroup. The bank estimates that a further 20 percent drop for oil, along with gains for the dollar, would cut thermal coal costs by 13 percent and iron ore by about 6 percent.

Cereal maker Kellogg Co expects "relatively benign" commodity inflation, Chief Financial Officer Ronald Dissinger said on Oct 30. The slump in oil will make some cotton fabric cheaper, Bryan Timm, chief operating officer of Columbia Sportswear Co, said on an Oct 30 conference call.

Not all commodities will benefit from cheaper oil. While energy accounts for about 40 percent of the cost of making aluminum, most of that fuel is coal or hydro-electric power, which have little or no relationship with crude prices, Haigh said in a report last month.

This year's oil slump may have come too late to benefit US farmers.

Growers usually buy tractor diesel, energy-based fertilizers and pesticides well before the harvests, which started in September for the biggest crops, corn and soybeans.

That means prices will need to remain lower for months to reduce farming costs for next season, Michael Swanson, a senior agricultural economist at Wells Fargo Co, the biggest US farm lender, said last month.

What is happening in oil might be separate from other commodities, said David Rosenberg, the chief economist at Gluskin Sheff & Associates Inc in Toronto.

Crude is dropping because of too much supply, not because demand is weak, so better economic growth should mean buoyant consumption for other raw materials, he said.

OPEC last month kept its output target unchanged even after the steepest slump in oil prices since the global recession.