From the copper mines in Chile to the corn farms of North Dakota to the oil fields of the Middle East, commodity prices have started to crumble.
The prices of metals, energy and agricultural goods have dropped as anxiety has ratcheted up over Europe’s currency crisis, China’s slowing growth and the stalling U.S. economy.
On Friday, copper futures fell to their lowest level of 2012. On Monday, cotton fell to a 31-month low. Sugar hit a 21-month low. Last week, the price of OPEC’s basket of crude oil grades slipped below $100 a barrel for the first time in nearly eight months.
“We’ve seen a decline in corn prices over past few months,” said Barton Schott, a third generation farmer in Kulm, N.D., who is chairman of the National Corn Growers Association. “I think it’s all related to the world economy and price of the dollar,” he said, adding that “outside investors” and investment funds that had been big buyers earlier in the year had reversed course and started selling corn a month and a half ago.
The recent drop in commodity prices could open up more room for fiscal or monetary stimulus without worries about igniting inflation.
“I think it remains the case that deflation should be more the concern of public officials than inflation,” said Edward Morse, head of global commodities research at Citigroup.
“This provides a green light for more stimulus, particularly monetary stimulus,” said Mark Zandi, chief economist of Moody’s Economy.com. “With lower commod prices, you get lower inflation.” He said he expects central banks “to press on the accelerator” and to engage in quantitative easing, a method of easing interest rates by buying securities.
For inflation fighters, the key issue is the direction of prices, not the price level. But most commodity prices are still high by historical standards. Though corn prices have dropped about 14 percent in the past year, Schott is still getting about $5.25 a bushel, high compared with prices before and after the 2008 price spike. He is adding to his corn acreage and is building a 100,000-bushel storage facility.
Oil prices have eased, too, but OPEC’s basket of crude oil never went above $100 until March 2008 and the average price this year — $115.43 a barrel — is still higher than last year’s record-setting level.
For commodities such as oil that are priced in dollars, the weakening euro has kept prices high in Europe.
Over the past decade, the drivers behind the huge increase in demand for goods such as copper and oil — both closely tied to economic activity — have been the emerging market countries.
Amrita Sen, a commodities analyst for Barclays Capital, says that “all of the growth in oil demand is being generated by four countries: China, India, Saudi Arabia and Brazil.” In Europe and the United States, oil demand is flat or declining.
In a May 15 presentation to analysts, Richard C. Atkinson, chief executive of mining giant Freeport-McMoran, said China’s economic growth could slow but still fuel higher demand for commodities because its increases in consumption would come on top of a bigger baseline.
He noted that China averaged 13 percent-a-year growth from 1995 to 2010, and its copper consumption grew by 6 million tons a year, or 37 percent of the global consumption. If China’s growth slows to 6 percent a year, by 2025 the country’s copper consumption would increase by 9.2 million tons a year, he said during a slide presentation.
“One thing we have to accept is that we are in a world of high commodity prices,” Sen said. “There’s a structural change going on. A lot of commodities are supply- constrained.”
But now, even that slower rate of growth in China is in doubt. On June 4, China reported that its Purchasing Managers Index (PMI), an indicator of manufacturing activity, fell to 50.4 percent in May, ending five consecutive months of growth.
“China, if it is not coming in for a hard landing, is having a pretty bumpy landing here,” said Zandi, who added that the economies of Brazil and Turkey have stalled while India has turned in its weakest growth in a decade.
When investors, alarmed by signs of new paralysis among Europe’s leaders and weaker growth in emerging markets, started to flee commodities and stocks, they turned to U.S. Treasury securities for safety. But with new jobs data showing weak U.S. growth, investors have turned to gold, making it one of the few commodities to rise.
“I think what commodity prices are telling us about the world economy is that there’s a massive amount of risk aversion,” Sen said. “The problem is that the U.S. data was looking good, and now even the U.S. data is not looking good.”