Scotiabank’s agricultural commodity price index lost “significant ground” in September alongside “broad-based” declines in wheat, barley, canola and livestock prices.
The bank’s Scotia Economics wing reported on Tuesday that its overall Commodity Price Index lost ground for the second consecutive month in September, dropping back 6.8 per cent month over month.
While still 24.5 per cent above the same month a year earlier, commodity prices overall are expected to retreat further in October alongside “faltering” global economic prospects, the bank said, “ushered in by a U.S. and European banking crisis, deleveraging by financial institutions and sharply tighter global credit conditions.”
Commodity price declines have been “heightened by a massive unwinding of futures and commodity-index investment positions by hedge funds,” the bank said, as those funds shift out of commodity investments now deemed to be “too risky in a global ‘deflationary’ economic environment.”
The decline in Scotiabank’s overall Commodity Price Index was led by its oil and gas sub-index, down 10.6 per cent over the previous month, and the agricultural sub-index, down 8.9 per cent.
Agricultural prices in the index remained 6.4 per cent above those in September 2007, the bank noted. But it also cited the Canadian Wheat Board’s recent drop in its asking export price for No. 1-grade wheat by 8.5 per cent, which put it below year-earlier levels in mid-October.
As the CWB observed last week, Scotiabank said grain processors are “attempting to reduce risk by paring inventories, purchasing on a hand-to-mouth basis and delaying capital expenditures.” A record world wheat crop also puts pressure on prices, the bank said.
Canola prices, by comparison, have held up the best among the three major Prairie crops, Scotiabank’s Patricia Mohr wrote in the report, citing the low trans fat and low cholesterol in canola-based processed foods for health-conscious consumers.
Mohr said the bank’s metal and mineral index has lost 9.7 per cent off its July 2008 peak and will “plunge” in October. Both base and precious metal prices dropped in September, she said, with only potash and cobalt bucking the trend.
Average spot potash prices rose from US$802.50 per tonne in August to US$862.50 in September and were stable in mid-October at about US$865 (FOB Vancouver), Mohr wrote. Potash prices are underpinned by record-low inventories in North America, “sold-out” contract volumes at major potash producers and a strike at three PotashCorp mines in Saskatchewan.
Potash application remains economically feasible at current corn prices and U.S. corn use is expected to rise with increasing U.S. mandates for renewable fuels in gasoline in 2009 and 2010, Mohr wrote.
Further, she wrote, China will need to restock potash in 2009 after a 50 per cent year-over-year plunge in its imports in 2008 to date.
Sulphur (also FOB Vancouver), a byproduct of Western Canada’s oil and gas production, dropped from US$685 in August to US$512 in September and just US$165 in mid-October, Mohr wrote. Diammonium phosphate (DAP) and some nitrogen fertilizers (urea) have also “retreated,” she said.
“Buyers have pulled back due to a lack of international trade credit and concern over the recent retreat in crop prices, expecting lower prices in the next several months,” she wrote.