Could Commodity Prices Rise In This Environment?

Everyone seems to believe that commodity prices will continue to come down as the global economy continues to slow and possibly go into a worldwide recession.  How could you argue with that?  Slower economy, less demand, and lower prices.  The Powershares DB Commodity Index Tracking Fund (DBC) and the Powershares DB Agriculture Fund (DBA) are both down about 40% since just July.  But, could they be on the rise soon?  Potentially.  Here’s one way.  Commodities and products are shipped all over the world.  And, those companies that do the shipping rely heavily on credit.  We all know that credit has basically frozen up right now.  Banks don’t trust each other or anybody else so loans are drying up.  If the people shipping the product or commodity can’t get credit and the person buying the commodity or product can’t get credit, then that commodity or product won’t get moved.

Let’s say location A in the United States relies on shipments of commodity X for their local economy.  All of the sudden, they aren’t getting that commodity but the demand has remained the same, prices will start to rise in that local community.  It could be real spotty but basically there will start to be a big disruption where you have too much of a commodity on Location B who doesn’t need it (where it originated from) and not enough of a commodity in Location A.  Picture that happening all over the world.  All in all, you might think that commodity prices would still stay the same.  But, it will be a local phenomenon with the shortages in certain locations.  I think we can zero in on commodities and products that we all have to use. That demand would stay consistent.  Those would be the agricultural commodities first of all.  We’re not going to stop eating.  Now, that doesn’t mean we can necessarily buy the stocks of food companies.  Right now, there is no appetite for risk so the “recession proof” stocks will stay under pressure.  But, what about the actual agricultural commodities.  Are they ripe for a trade?  Looking at the Powershares DB Agriculture Fund (DBA), I’d say stay away from it right now.  There’s still too much selling pressure.  But, if you see it start going up and everyone asking how could that be, it might be because of transportation (supply) disruption, not necessarily demand destruction.

Dow Details

I’ve posted a graph of the best 10 performers in the Dow and the worst 10 performers year to date for your interest.  The numbers are quite fascinating.


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