Commodities: Performance Drivers in 2014
YTD Performance Review
ROLAND MORRIS: During the first quarter of 2014 most index products had a fairly positive return, driven in particular by some soft commodities: grains, coffee, and protein. We believe these commodities’ appreciation was driven by some supply problems that were unexpected by the market. We had some severely dry weather in Brazil, which hurt Brazilian grain crops this winter. Additionally, it also hurt the coffee crop. In the U.S. there was a virus in the hog herd, which created extreme tightness in the hog market, and also caused all meats to rise due to substitution. We had very strong performance from those sectors, and that likely drove the majority of positive returns in most index products during the first quarter.
MORRIS: I believe that supply disruptions have been responsible for positive commodity performance for most indexed products. As we look ahead in the year, there's an ongoing supply problem with South African production of platinum, palladium, and gold. They continue to have labor issues, and currently they're not producing. Additionally, Indonesia has disallowed the export of unrefined base metals and that is creating some tightness in the nickel market. These are supply problems that were somewhat unexpected by the market. Furthermore, these supply problems look like they could persist.
On the geopolitical front, if Russian tensions continue to escalate, we're likely to have additional supply problems in base metals, particularly palladium and nickel.
Headwinds in 2014
MORRIS: In the near term commodity demand continues to be somewhat questionable. There are continued concerns about EM growth trends, China in particular. In the longer term we suspect that those economies will rebalance and start to grow at some point later this year or in 2015. I believe it's really a matter of emerging markets adjusting to the U.S. credit cycle, and they're in the process of making that adjustment. It does involve slower growth short term but longer term, we continue to see positive demographics and positive growth trends, which should reignite commodity demand. Additionally, the current supply constraints, particularly with base metals, look to be lasting as the industry overall has had to cut back on what I would call long-cycle commodities in the industrial metals sector. They've cut back on mine development and investments and we're essentially rationalizing future supply. Combine that with longer-term positive trends in emerging markets, we do think commodities will do better over the long haul.
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