OLD Media Moves

Falling commodities prices

May 28, 2013

Posted by Liz Hester

Falling commodities prices could signal that global inflation will remain low. It’s also an interesting story that touches all aspects of business from raw materials to investors’ portfolios.

The Wall Street Journal had an interesting piece on what it means for businesses and consumers alike:

Lower prices for commodities from cotton to copper are helping U.S. businesses by reducing their raw-material costs and buoying consumers by keeping a lid on prices paid.

Copper, used in many goods including electronics, is off nearly 10% this year. Silver, which has various industrial uses, has tumbled more than 25%, and wheat is down more than 10%.

While lower commodity prices are bad for producers and countries reliant on exporting raw materials, they are good for Alabama Chanin, a Florence, Ala., maker of high-end clothing. Cotton prices are up a bit this year, but they are down about 50% since a surge two years ago. The cost of organic cotton—a niche product that Alabama Chanin uses exclusively in its wares—has roughly tracked that price movement.

But those lower cost goods also signal some economic weakness, the story said:

Cheaper commodities have a dark side, as they reflect weak global growth. But they also act as a subtle economic stimulus. Consumers paying less for clothes have more to spend on cars and dinners out, while companies pay less for many costly supplies.

Lower commodity prices are one reason inflation remains subdued. U.S. consumer prices rose 1.1% in April from a year earlier, well below the Federal Reserve’s target of about 2%. In The Wall Street Journal’s latest survey of economists, 47.5% said weakness in commodity prices was a worrying sign, but 52.5% saw an encouraging signal of lower costs for businesses and consumers.

The lower commodity prices “will be a tailwind, a gentle tailwind,” said Nariman Behravesh, chief economist at IHS, who projects the U.S.’s gross domestic product will grow 2.5% to 3% over the long term—instead of 2% to 2.5%—because of lower commodity prices, especially energy. Since the U.S. recovery began in mid-2009, the economy has grown at an annualized rate of just 2% on average.

Fortune cites three reasons why falling commodity prices might be good for consumer and investors:

Bigger retail sales

Lower gasoline prices may be signaling slower growth throughout the world’s major economies, but they have also left U.S. consumers with some extra spending money.

What they aren’t spending to refuel their cars, they’re spending on everything from electronics to clothes. In April, retail sales unexpectedly edged up 0.1% after a 0.5% decline in March.

Happier stockholders

Investors typically see gold as a hedge against rapidly rising prices. But with global inflation falling, gold prices have tumbled — officially entering a bear market last month.

Lower grocery bills

The decline in corn, soybean, and wheat prices may have left some traders scrambling, but it should bring good news to shoppers in U.S. grocery stores.

Farmers this year are expected to harvest record crops, after recovering from the worst drought to ravage the industry in decades. With bigger supplies, corn prices are forecast to average $4.80 per bushel, down a third from the previous year’s average, according to the U.S. Department of Agriculture. Corn prices are closely tied to supermarket prices, since it’s a key ingredient in many foods and used as feed for livestock. Soybeans are expected to average $10.50 a bushel, down 27%; wheat is forecast to decline by 11% to $7 a bushel.

Either way, if prices remain depressed, look for money managers to review portfolio allocations and attempt to predict which way inflation is heading. With the Federal Reserve’s current monetary policy, many have been waiting to see inflation creep up. Seems that depressed parts of the rest of the global economy may keep that from happening.

It’s an interesting business story, especially given all the moving parts that go into determining commodities prices. And with growing season beginning in the U.S., look to see a swing in futures prices as well as farmers try to lock in a decent payout for their upcoming harvests.

Subscribe to TBN

Receive updates about new stories in the industry daily or weekly.

Subscribe to TBN

Receive updates about new stories in the industry.