The final quarter of 2015 is now in the books and for the most part, it was more of the same for commodity prices. Overall, a composite of over thirty commodities moved lower once again in a continuation of the secular bear market for commodity prices. In Q1 the composite dropped by 6.54%. In Q2 we saw a rebound of 3.15%. In Q3 commodity prices fell by 9.43%; and in the final quarter of the year, they declined by another 4.38%.
The Dollar and Commodities - Deflation?
The dollar index futures contract moved 2.35% higher during the final quarter of 2015.
The weekly US dollar index chart moved 8.93% higher in 2015. The inverse correlation between the dollar and commodity prices held during the year, with the dollar higher and a composite of thirty-three commodity prices down by 17.54% on the year. This tells us that commodity prices in 2015 have underperformed the dollar, which indicates that deflationary pressures continue to plague the global economy.
The Federal Reserve kept its promise to markets at the December meeting. The central bank raised the Fed Funds rate by twenty-five basis points for the first time in nine years. In the statement that followed the meeting, the Fed Chairperson said that while future increases will be data dependent, markets should plan for three to four more increases in 2016.
Inflation continues to run below the Fed's 2% target rate, but US growth is moderate, which justifies increases in the short-term interest rate away from zero. Increasing US interest rates support the trend of the dollar. For commodity prices in 2016, this is likely to mean more of the same.
China Continues to be a Bearish Factor
As the Chinese economy shifts from heavy manufacturing to a consumer-oriented model, the demand for raw materials from the Asian nation has decreased. The 7% target growth rate remains elusive despite the devaluation of the yuan, lower domestic interest rates, and other government efforts to stimulate the economy. The problem in China is that it has become harder to grow at such a high percentage basis as the size of the economy has swelled to the second largest in the world. Slower growth in China is likely to continue throughout 2016, and this is not good news for commodity markets.
Producers of commodities continue to suffer under the weight of falling raw material prices. Nations that depend on revenues from commodity sales like Russia, Brazil, Australia, and Canada have seen their currencies depreciate. Oil producing nations are now feeling the pinch related to a price that is below $40 per barrel.
While energy, metals, and grain prices fell during the final quarter of 2015, one sector had positive results.
Soft Commodities - the Only Winning Sector in Q4
Soft or luxury commodities were all winners at the end of the fourth quarter. Frozen concentrated orange juice futures were the biggest gainers for the three-month period, finishing 32.64% higher. Sugar appreciated by 18.32%. Cotton posted a 4.7% gain, and coffee was up by 4.41%. The price of cocoa added 3.12% over the final three months of the year. The soft commodity sector rallied by 12.64% in Q4. It was the best-performing commodity sector of 2015 even though it lost 0.74% on the year. Cocoa was the big winner in 2015 posting a gain of over 10%.
Every other commodity sector moved lower. The worst performing sector in Q4 was once again energy, which plunged by another 15.14%. NYMEX crude oil was down 17.85%. Brent crude lost 22.86%. Gasoline was the best performer, losing 7%, while heating oil was the worst, dropping 26.9%. Natural gas moved 7.41% lower, and ethanol fell 8.79%. In 2015, the energy composite fell just over 25%.
The composite of grain prices was down by 6.97% in Q4 and lost a total of 14.48% in 2015. Soybean meal was the big loser, down 14.27% in Q4. CBOT wheat shed 8.34% of value during the period. Corn dropped 7.48%, while soybeans moved 2.47% lower. The soybean crush moved lower even though soybean oil rose by 12.73%, due to the larger fall in meal prices. Oats dropped another 4.19%, making oats the worst performing grain for 2015, down over 28% on the year. Rice, which rallied by 26.26% in Q3, fell 12.39% in Q4 and ended the year with an anemic gain of less than 1%.
Metal prices continued to fall. The only metal posting a gain for the quarter was lead, which was up by 7.36%. Every other metal, precious and non-ferrous, fell in Q4. Every single metal, including lead, moved lower in 2015. The price of nickel plunged by over 42% in 2015. Platinum, palladium, copper, zinc, and tin all moved lower in Q4 and all lost over 25% of their value on the year. Gold and silver each lost just under 5% in Q4 and were both down over 10% in 2015. It was another ugly year for metals, with the precious metals composite falling 6.36% in Q4 and 19.46% for the year. Base metals on the LME moved 5.44% lower in Q4 adding to losses, that sector plunged 23.43% in 2015.
Animal protein prices showed mixed results in Q4 but all moved lower in 2015. Live cattle futures rebounded 9.73% in Q4 but fell 16.36% on the year. Feeder cattle moved 6.33% lower in Q4 and were down over 23% in 2015. Lean hog prices shed 18.47% of value in Q4 and 26.35% on the year.
2016 - More Volatility Ahead, but the Fifth Year of a Secular Bear Market
The secular bear market in commodities began in 2011 when many raw materials made highs. Since then, we have seen four straight years of lower highs and lower lows in most commodities. As we head into 2016, there are signs that we are in for another year of the same - another year of lower highs and lower lows in the commodity sector.
The trend in the dollar is higher. Interest rates in the US are now rising. China continues to suffer from a slower rate of growth. These factors do not support a rebound in raw material prices. The only bright spot for commodity bulls in 2016 could be in the agricultural markets. A recent report from NASA said that the strongest El Niño since 1997 is likely to continue to affect weather patterns deep into 2016. This could mean a lot of action in the soft commodity sector and perhaps the grain markets in the months ahead.
For those commodities that do not depend on weather for price direction, 2016 may be another year of lower highs and lower lows. The production cost for many raw materials has dropped with energy prices, which is a key cost-of-goods-sold input. This will lower the bar for producers to sell, and could mean that selling will continue without output cuts over the months ahead.
Meanwhile, markets do not move in a straight line. It is probable that we will see increased volatility in all markets in 2016. The world is a volatile place and markets tend to reflect world events. Volatility is a seasoned trader's best friend. For a nimble trader, increased volatility in markets in 2016 always increases the potential for divergences and trading opportunities.