July 24, 2008 in Business

Weather, economy deflate prices

Commodities boom slows, a sign of relief for consumers
By STEVENSON JACOBS Associated Press
 

NEW YORK – Only a month ago, sizzling commodities prices seemed destined to soar higher with record-breaking rallies in crude oil and corn. But now the boom appears to be taking a breather, cooled by a weakening economy and a milder Mother Nature.

In just seven trading days, oil has lost more than $20 a barrel, or 14 percent, as record energy prices eat into demand. Meanwhile, corn has fallen 21 percent, soybeans 12 percent and wheat 8 percent since the start of the month, as ideal farming weather boosts Midwest crops battered by recent floods. Even gold, a bellwether of the commodities boom, has lost ground, falling 6 percent in the last week.

Commodities turned even lower Wednesday in the second straight sell-off, with silver, copper and wheat all trading lower.

So is the commodities bubble about to burst?

Analysts aren’t ready to go that far, noting that such statements in the past proved premature. But most concede that the steep drops in energy, grains and precious metals at least signal a slowdown in the frenetic futures markets – possibly providing much-needed relief for consumers struggling to cope with soaring prices at the pump and in the grocery aisle.

“Commodities in general have cooled a bit,” said Darin Newsom, analyst with DTN in Omaha. “We had such an enormous run, and big rallies lead to corrections. The great question is whether it’s long term or short term.”

He noted that the seemingly relentless drive in commodities – crude oil and corn have both doubled in the past year – was built largely on robust demand for raw materials, especially in fast-growing economies in China and the Middle East. A weakening U.S. greenback fed that demand by making dollar-denominated commodities cheaper to overseas buyers.

But with record energy prices and soaring costs for other commodities, “a lot of that demand has died out,” Newsom said.

The turnaround is on full display in the once white-hot grains market, which shot to record-highs in June after devastating floods swallowed chunks of the Midwest and wiped out corn and soybean fields.

Corn prices neared an unprecedented $8 a bushel, forcing the temporary closure of several ethanol plants that use the grain as their main feed stock. Livestock owners also suffered, as the rocketing cost of corn-based animal feed made raising hogs and other animals unprofitable.

But things brightened earlier this month as a burst of warm, dry weather blanketed flood-stricken areas, drying out waterlogged crops and boosting hopes of a decent – maybe even good – harvest. The optimism has helped push corn prices down more than $2 a bushel, low enough for some end users to start buying again.

© Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email