Commodity Index Hits Seven-Month High but Brexit anxiety now rippling through global markets

Transcription

1 A monthly commodity watch June 2016 Commodity Index Hits Seven-Month High but Brexit anxiety now rippling through global markets The BMO Capital Markets Commodity Price Index forged ahead with a fourth consecutive monthly gain in May, advancing 5.5% to its highest level since October Once again, the biggest boost came from crude oil, which breached the $50 mark in early June. Most recently, however, the jolt of uncertainty stemming from the UK s decision to leave the EU has caused growth-oriented commodities to falter, and has added further weight to our expectation of a more restrained commodity recovery ahead. The Oil & Gas Index jumped sharply for a third consecutive month in May, once again climbing on a significant rise in crude oil, which rose 15%. Oil was driven higher by production declines due to the Alberta wildfires and insurgencies in Nigeria and Libya. The energy index will show a fourth straight rise in June, this time driven by a close to 30% jump in natural gas, as hot weather in many parts of North America raised the demand for air conditioning and gas-driven power generation. The Metals & Minerals Index retraced most of its April loss, rising 0.4% in May. Precious metals were the big winners, backed by safe-haven demand in the lead-up to the Brexit referendum. Gold and silver reached their highest average levels in 21 and 16 months, respectively. Conversely, most base metals dipped as the U.S. dollar strengthened, with the exception of zinc, which is now up more than 25% since the start of the year. The Forest Products Index sprang 2.1% in May, sparked by structural and seasonal strength in wood products. While U.S. housing starts haven t truly broken out, the past five months have been the strongest and most stable in some time, giving builders the confidence to stock inventory ahead of the summer building season. Oriented strand board has shown its first concerted move in over two years, jumping $29 in May to $276/mft 2, the highest level since June Lumber continued to build on its earlier gains, with spruce-pine-fir advancing $22 to $318/mbf. The Agriculture Index edged up 0.6% in May on a thoroughly mixed performance across components. On the positive side of the ledger, canola prices gained 4.8% alongside the broader oilseed complex, while hog prices popped a better-than-seasonal 10.1%. These gains were largely offset by a modest drop in wheat prices and a 6.8% slide in cattle, both of which resulted from persistent signs of abundant supply (see livestock feature on page 2). ECONOMIC RESEARCH Earl Sweet, Senior Economist & Managing Director earl.sweet@bmo.com Alexandros Koustas, Senior Economist alex.koustas@bmo.com Aaron Goertzen, of Senior Economist aaron.goertzen@bmo.com Sarah Howcroft, Economist sarah.howcroft@bmo.com All Commodities Index BMO CAPITAL MARKETS COMMODITY PRICE INDEX (3 = ) A Publication of BMO Capital Markets Economic Research Douglas Porter, CFA, Chief Economist May Level % Change from (3=) Mth. Ago Yr. Ago All Commodities Oil & Gas Metals & Minerals Forest Products Agriculture

2 Page 2 of 9 June 2016 Commodity Focus: Livestock Herd Expansion Trampling Prices Aaron Goertzen, Senior Economist aaron.goertzen@bmo.com It s been wild ride in the livestock space over the past few years to put it mildly. After a painful start to the decade, consecutive North American bumper crops have now kept feed costs depressed for three straight years, providing a badlyneeded lift to the economics of livestock production (Chart 1). Initially, lower crop prices prompted a surge in livestock markets as producers reacted to escalating profitability by holding back animals to expand their herds, reducing the supply available for consumption. Those expansion decisions have now come home to roost, as rising supply has left livestock prices at multi-year lows despite a modest and partly-seasonal rebound this spring. In the cattle segment, the expansion now underway marks the first upturn in the U.S. herd since the early 1990s. In addition to lower feed prices, the upswing is being supported by a dramatic improvement in pasture conditions in Texas and nearby cattleproducing states, following nearly half a decade of drought. The calf crop, which turned up in 2014, has risen by nearly one million head per year and is now translating into a greater supply of animals available for slaughter. As a result, cattle prices dropped to a threeyear low of US$121/cwt in May, down nearly 30% from recent highs (Chart 2). With the calf crop still on the upswing, supply is likely to become even more abundant over the next couple years, suggesting that the plunge in prices still has room to run. Indeed, there is a meaningful chance that prices will overshoot economically sustainable levels to the downside a typical feature of the boombust cattle cycle and ultimately trigger a shift toward industry retrenchment. Overall, rising supply is expected to reduce cattle prices from an average of $146/cwt in 2015 to $123 in 2016 and $115 in 2017, with risk tilted to the downside CHART 1: USDA PRICE INDEXES (2010:01 = ) Feed Grains Meat Animals CHART 2: CATTLE PRICES & CALF CROP CME Live Cattle Futures Price (lhs, US$/cwt) 80 Calf Crop (rhs; mln head; 12-month m.s.) In the hog market, supply and prices have been steered not only by feed price dynamics over the past few years, but by the emergence, spread, and eventual containment of PED virus in 2013 and The virus, which resulted in an estimated 8 million animal losses in the United States, pushed hog prices to an all-time high of US$128/cwt in mid-2014, at which point mortalities began to fade

3 Page 3 of 9 June 2016 and lucrative prices triggered a massive surge in the pig crop (Chart 3). The explosion of hog and pork production has put severe pressure on hog prices, which fell to just $56 at the end of Fortunately, hogs relatively short gestation period allows producers to react fairly quickly to market signals (at least, compared to the cattle segment), so the pig crop and hog slaughter have already started the required downward adjustment. Together with the usual summer demand upswing, this brought hog prices back to $79 in May. Looking ahead, hog prices are expected to increase moderately from an average of $69.40 in 2015 to $73 in 2016 as production tapers down to a more economically sustainable pace. Hog prices are expected to stabilize in the $80 range in 2017, broadly in line with longer-term norms CHART 3: HOG PRICES & PIG CROP CME Lean Hog Futures Price (lhs, US$/cwt) Pig Crop (rhs; mln head; 12-month m.s.)

4 Page 4 of 9 June 2016 Energy and Materials Crude Oil Natural Gas (WTI) (Henry Hub) (Alta. Empress) Lumber Pulp Newsprint US$/bbl US$/mmbtu US$/mbf US$/tonne y-t-d June July August September October November December January February March April May m-t-d June n.a. n.a. Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

5 Page 5 of 9 June 2016 Base and Precious Metals Copper Aluminum Zinc Nickel Gold Silver US$/lb US$/oz y-t-d June July August September October November December January February March April May m-t-d June Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

6 Page 6 of 9 June 2016 Agriculture Wheat Canola Cattle Hogs US$/bushel US$/tonne US$/cwt n.a. n.a n.a. n.a y-t-d June July August September October November December January February March April May m-t-d June Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

7 Page 7 of 9 June 2016 Commodity Indices and Forecasts All Oil & Metals & Forest Agricultural All US$-terms : 3 = Annual Commodities Gas Minerals Products Products Commodities C$-terms Forecast Quarterly 2014 Q Q Q Q Q Q Q Forecast Q Q Q Monthly 2015 May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Commodity price indices and forecasts are by BMO Capital Markets Economics. Forecasts are independent of those used by BMO Capital Markets Equity Research.

8 Page 8 of 9 June 2016 Historical Charts: All-Commodity Index Nominal US$-Terms (3 = ) Real US$-Terms (3 = ) Nominal (3 = ) US$-terms C$-terms

9 Page 9 of 9 June 2016 Technical Note The BMO Capital Markets Commodity Price Index is a fixed-weight, export-based index that encompasses the price movement of 19 commodities key to Canadian exports. Weights are each commodity s average share of the total value of exports of the 19 commodities during the period Similarly, weights of sub-index components reflect the relative importance of commodities within their respective product group. The all-commodities index and sub-indices consist of the following: Weight in Weight in All-Commodities Weight in All-Commodities Weight in Percent Index Sub-Index Index Sub-Index Metals & Minerals Forest Products Gold Newsprint Silver Market Pulp Aluminum Supercalendered Paper Copper Lumber Nickel OSB Zinc Uranium Agricultural Products Potash Wheat Canola Oil and Gas Hogs Crude Oil Beef Cattle Canadian Natural Gas All Commodities.0 Unless otherwise specified, all indices reported in this publication correspond to prices in U.S. dollars. General Disclosure BMO Capital Markets is a trade name used by the BMO Financial Group for the wholesale banking businesses of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries ( BMO Financial Group ) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. Dissemination of Research Our publications are disseminated via and may also be available via our web site Please contact your BMO Financial Group Representative for more information. Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research which is available at ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, personal and commercial banking clients are served by BMO Harris Bank N.A., Member FDIC. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A, BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC), BMO Nesbitt Burns Securities Limited (Member SIPC) and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India. Nesbitt Burns is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. BMO Capital Markets is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. Trademark Bank of Montreal in the United States and Canada. COPYRIGHT 2016 BMO CAPITAL MARKETS CORP. A member of BMO Financial Group