A monthly commodity watch June 2017

Transcription

1 A monthly commodity watch June 2017 Commodity Index U-Turns in May Index eluding a trend as crude oil prices continue to seesaw The BMO Capital Markets Commodity Price Index dropped 2.8% to a six-month low in May, reversing the prior month s gain. Losses extended almost across the board, with the exception of the agriculture sub-index. Oil was the month s biggest loser, shedding 5.0% as markets discounted the potential boost from extended OPEC-led supply cuts. A softer U.S. dollar should provide a modest tailwind for commodities over the near term. The Oil & Gas Index slid 4.4% in May, largely reflecting a drop in crude oil as markets increasingly focused on rising U.S. production from shale resources and excessive inventories in the Americas, even though markets overseas have been tightening. The extension of the production curtailment agreement by OPEC and 11 other exporters in late May already had been priced into the market. While we continue to anticipate more balanced markets by the first half of next year, we have reduced our forecast for WTI by US$2/barrel for both 2017 and The Metals & Minerals Index fell 2.3% in May, marking the biggest decline since December. Losses were universal, led by silver s hefty 7.2% fall, which raised the gold/silver ratio to its highest level in a year. Copper, nickel and zinc continued to retreat from their recent highs, though copper has stabilized as of late. With earlier supply concerns failing to materialize in the Philippines, nickel is now hovering around 12-month lows, having fully retraced its H gains. The Forest Products Index tumbled 1.3% in May as the deadlock in the lumber market was finally broken. Buyers had sat on the sidelines in hopes that prices would soften and were rewarded for their patience as Spruce-Pine-Fir prices declined $19 to average US$388/mbf. With demand crimped by wet weather in some states and buyers able to maintain inventories through wholesale channels, negotiations resulted in softer mill pricing. Prices continued to fall in June, though they appear to have settled just above US$360/mbf. The Agriculture Index sprouted 2.1% in May following back-toback monthly declines. Hog prices led the advance with an impressive 17% pop, well beyond the 10% seasonal bump that is normally seen in May as consumers begin to fire up their grills. In the crop space, wheat prices posted a moderate 2.3% gain in May before rallying around 8% in the opening weeks of June as the emergence of drought conditions in the northern Great Plains raised the possibility of a smaller North American crop this year. Aaron Goertzen (Agriculture) aaron.goertzen@bmo.com Sarah Howcroft (Metals & Minerals, Editor) sarah.howcroft@bmo.com Alexandros Koustas (Forest Products) alexandros.koustas@bmo.com Earl Sweet (Oil & Gas) earl.sweet@bmo.com All Commodities Index BMO CAPITAL MARKETS COMMODITY PRICE INDEX (2003 = ) A publication of BMO Capital Markets Economic Research Douglas Porter, CFA, Chief Economist economics.bmocapitalmarkets.com May Level % Change from (2003=) Mth. Ago Yr. Ago All Commodities Oil & Gas Metals & Minerals Forest Products Agriculture

2 Page 2 of 9 June 2017 Commodity Focus: Livestock Is the stage being set for another leg down? Aaron Goertzen aaron.goertzen@bmo.com Livestock markets continue to recover from a terrible 2016 that saw cattle prices touch a six-year low and hog prices plunge to depths not seen in nearly 15 years. Since bottoming last October, cattle prices have rebounded 25%, while hog prices have staged a sizzling 60% advance, or around 33% after adjusting for pronounced seasonality in that market (Chart 1). There is little question that this impressive recovery has partly reflected the excessive nature of last year s sell-off; but, with supply abundance still featuring prominently in both segments, it s worth considering whether current prices are likely to have staying power. It s sometimes said that the only solution to low prices is low prices, which create a foundation for recovery by stimulating demand and reducing the incentive to produce. On the demand front, this dynamic is readily observable in livestock and meat markets. In the United States, last year s food price deflation (which totaled 2.7% from peak-to-trough) has helped spur a big advance in grocery purchase volumes, which grew an impressive 4.9% y/y in Q1 the fastest pace in four decades (Chart 2). International trade in meat products has also reacted favourably to lower U.S. prices, with greater net exports of beef and pork helping to absorb some of the excess supply in the United States (Chart 3). But while last year s plunge in prices has stoked livestock and meat demand, there is scant evidence of a supply pullback in fact, supply remains on the upswing, raising doubts about the durability of the recovery. In the cattle space, beef production continues to expand and, according to upwardly-revised U.S. Department of Agriculture (USDA) projections, is likely to reach a nine-year high this year (Chart 4 on next page). Moreover, the USDA expects the U.S. cattle herd to expand yet again this year despite the increase in slaughter, as producers have skewed the slaughter mix toward steers and increased retention of heifers for breeding (Chart 5 on next page). After four straight years of herd enlargement, the current expansion represents the largest upturn in U.S. cattle capacity since the early 1990s, which was rewarded with a halfdecade-long slump in prices as producers undertook a painful but necessary process of consolidation. Supply is also rising in the hog segment, against earlier expectations of tighter market conditions this year. The USDA now projects pork production to increase for a third straight year in 2017 and has revised expected output higher by around 2% since the start of the year. As in the cattle segment, an increase in breeding suggests that rising slaughter will not be sufficient to stabilize the hog herd this year, contrary to the USDA s CHART 1: CME CATTLE & HOG PRICES (US$/cwt, front-month contract) Lean Hogs Live Cattle 40 CHART 2: U.S. GROWTH IN REAL FOOD SPENDING (percent change, y/y) CHART 3: U.S. BEEF AND PORK NET EXPORTS (billions of lbs, 12-month moving sum) Beef (lhs) Pork (rhs)

3 Page 3 of 9 June 2017 expectations just months ago. Currently, the USDA estimates that the hog herd will increase by 650,000 head in 2017, or around 1%, which will add to current abundance and could necessitate unpleasant adjustments down the road. Rising supply is not unique to the United States, either. Most major pork-producing countries are in expansion mode most notably China, the world s largest producer and consumer of pork, which continues to modernize its livestock operations. All of this begs the question: why are we seeing continued herd expansion despite last year s market meltdown? The answer is found upstream in the crop industry, where an improbable run of exceptional North American harvests has provided major relief on feed costs. Supportive weather has also extended to North America s pasture land, to the delight of cattle ranchers. As a result, livestock-to-feed price ratios, a rough proxy for industry margins, are currently near long-term norms despite last year s market plunge. But while current crop stockpiles will likely take some time to work down, feed prices will not stay this low forever. Crop supply will ultimately be tempered by either trend-reversion in crop yields or producer exit, as losses in the crop industry are now widespread. The risk for livestock producers is aggravated by the fact that they typically respond to cost pressure by liquidating animals en masse, which tends to weigh heavily on livestock prices and compresses margins even further. Unfortunately, it also appears that the recent upturn in demand may not have an entirely sturdy footing. On the domestic front, the rebound in livestock prices over the past six months will almost certainly temper consumption growth as prices begin to reflate at the meat counter (processor hedging means that it takes time for changes in livestock prices to affect consumers). Trade flows are similarly at risk from firmer U.S. prices, and are also vulnerable to the protectionist leanings of the current U.S. administration CHART 4: U.S. BEEF AND PORK PRODUCTION (metric tonnes, millions) 9 (Mexico imports U.S. pork intensively). There are also signs that meat demand may be slowing in China as its growing middle class becomes increasingly health-conscious. Overall, risk in the livestock market appears tilted to the downside. In the cattle segment, where expansion barely faltered in response to last year s market plunge, this is not a new warning. Cattle herd cycles can easily span five to seven years or more, and with just two and a half years having passed since prices peaked in late 2014 and supply still on the upswing, it would not be surprising to see a renewed downturn in the market. Overall, cattle prices are expected to edge up from an annual average of US$119/cwt in 2016 to $120 in 2017 before reversing course to $115 in Given the segment s lengthy gestation and development cycle, which spans around 18 months in total, it would be reasonable to expect cattle to remain on the defensive into 2019 as the market continues to digest expansion decisions being made today. In contrast, the outlook for the hog market has changed considerably since the start of the year, as preliminary signs of supply restraint have given way to indications of sustained expansion. As a result, hog prices are now expected to increase from an average of US$66/cwt in 2016 to $70 in 2017 before backtracking to $68 in Futures markets would seem to agree, with contracts for delivery in 2018 priced at a moderate discount to those expiring this year. The hog market should begin to regain traction in late 2018 and beyond as herd size and industry capacity is rationalized Beef Pork USDA Projection CHART 5: U.S. CATTLE AND HOG HERD (head count, millions) Cattle (lhs) Hogs (rhs) USDA Projection

4 Page 4 of 9 June 2017 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. 366 n.a. n.a. Forecast 2017 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 2017 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 2017 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 2017 Agriculture Wheat Canola Cattle Hogs US$/bushel US$/tonne US$/cwt n.a. n.a y-t-d June July August September October November December January February March April May m-t-d June Forecast 2017 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 2017 Commodity Indices and Forecasts All Oil & Metals & Forest Agricultural All US$-terms : 2003 = Annual Commodities Gas Minerals Products Products Commodities C$-terms Forecast Quarterly 2015 Q Q Q Q Q Q Q Forecast Q Q Q Monthly 2016 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 2017 Historical Charts: All-Commodity Index Nominal US$-Terms (2003 = ) Real US$-Terms (2003 = ) Nominal (2003 = ) US$-terms C$-terms

9 Page 9 of 9 June 2017 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 Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Limited 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 2017 BMO CAPITAL MARKETS CORP. A member of BMO Financial Group