Our view: After the deflation of the asset bubble caused by hot money flow, we believe that the physical fundamental story still stands in the agricultural commodities space. The demand and supply fundamentals remain supportive in the medium term.On Demand: In our view, we could have seen the lowest demand levels this quarter. Even as a big producer of soft commodities, China will continue to need to rely on imports to meet its increasing demand, as evidenced by recent increases in soybean prices driven by stockpiling in China.
On Supply: The high capacity utilization currently for the softs makes supply vulnerable to planting delays due to bad weather, thus giving good support to prices.
Inflationary expectation will sustain the money flow into the commodities market, as economic condition stablize. Hence, we remain positive in commodities. Clients can look to nimble on DBA, and invest into Schroder Alternative Solutions Commodity Fund to gain exposure.
GS - Commodity Watch
Commodities have been trading on improving forward-looking macro data, which has reinforced our view of a more positive outlook for demand growth and prices in 2H2009. For this reason, our expectations of a pullback in prices on still-weak current fundamentals have either proven short-lived or have not been realized at all. In our view, commodities can continue to price the more positive forward outlook despite weak current fundamentals as long as inventories can continue to build. But this will likely not be the case for energy, which is already approaching storage constraints.
We also emphasize that improvement in not only forward, but also coincident, indicators in the Chinese economy will likely hasten improvement in fundamentals for agriculture and metals, which are particularly leveraged to Chinese growth. Given the above, we expect three important characteristics of commodities will be key to performance over the next six months:
1) The degree of leverage to China for the commodity. Today, leading indicators look much better than the coincident indicators. China is the exception, where the coincident indicators are positive. Copper, zinc and soybeans have more leverage to China and therefore a stronger near-term outlook.
2) The anticipatory nature of the commodity Storage bridges the gap between today and tomorrow. Commodities that are easier to store, such as metals and agriculture, are more anticipatory. Energy is more costly to store and therefore less anticipatory. Breaching storage capacity would force energy to price today, leading prices lower.
3) The degree of capacity utilization for the commodity Tomorrow, those commodities with the highest capacity utilization rates, such as energy are best poised once global growth resumes.
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