Commodities supercycle slowed down in 2012
(AgProfessional Editor Note: This is a report from Worldwatch Institute that financed a study to examine the global commodities market. This could be classified as an activist point of view rather than mainstream agriculture analysis.)
Global commodity prices dropped by 6 percent in 2012, a marked change from the dizzying growth during the "commodities supercycle" of 2002-12, when prices surged an average of 9.5 percent a year, or 150 percent over the 10-year period, according to the new Vital Signs Online trend released by the Worldwatch Institute (www.worldwatch.org). This change of pace is largely attributed to China's shift to less commodity-intensive growth. Yet while prices declined overall in 2012, some commodity categories-energy, food, and precious metals-continued their decade-long trend of price increases.
The commodities market consists of various raw materials and agricultural products with fluctuating value that are bought and sold in global exchanges. This includes agricultural products, such as corn, wheat, soybeans, and cotton; energy sources, such as crude oil and natural gas; metals used in construction, such as copper and aluminum; and precious metals that are often used for financial security, such as gold, silver, and platinum.
"Commodity prices were generally in decline for decades before 2002," said Mark Konold, Worldwatch's Caribbean Program Manager and the report's author. "But as the number of rapidly growing emerging economies grew after 2000, urbanization led to a surge in demand. But that demand bumped up against a supply that was limited because of underinvestment in new capital expenditures as well as the difficulty of procuring new supplies due to stricter environmental regulations and deposits that were more remote. This opened the door to a dizzying climb in commodities prices over the next 10 years."
During the supercycle, the financial sector took advantage of the changing landscape, and the commodities market went from being little more than a banking service as an input to trading to being a full-fledged asset class-what some people refer to as "the financialization of commodities." These days, large investment banks that participate in both the financial and commercial aspects of commodities trading dominate the landscape.
At the turn of the century, total commodity assets under management came to just over $10 billion. By 2008 that number had increased to $160 billion, although $57 billion of that left the market that year during the global financial crisis. The decline was short-lived, however, and by the end of the third quarter in 2012, the total commodity assets under management had reached a staggering $439 billion.