About $873 billion was pulled from U.S. exchange-traded products backed by raw materials this month, the most since April, data compiled by Bloomberg show. Expanding surpluses, a surging dollar and slowing growth in China helped send the Bloomberg Commodity Index to the lowest since 2009, reversing first-half gains fueled by a polar vortex and dead pigs in the U.S., and escalating tensions in Ukraine and the Middle East.
Banks from Societe Generale to Citigroup expect the losses for many raw material to continue. U.S. farmers are collecting the biggest corn and soybean crops ever, and global stockpiles of nickel are at an all-time high. Americans are producing the most oil since 1986, compounding a global surplus. China, the largest consumer of grains, energy and metals, is poised for its slowest expansion in two decades.
"The commodity complex as a whole did really well for a long time, and as a result, a lot of money poured in across the board and created oversupply and over-capacity," said Peter Sorrentino, a Cincinnati-based fund manager who helps oversee $1.8 billion at Huntington Asset Advisors. "It definitely has been an asset class that people have been withdrawing money from. Hedge funds congregate in momentum trades, and over the last two years, commodities have been sources of cash."
The Bloomberg Commodity Index fell on Sept. 22 to the lowest since July 2009 and is down 4.7 percent this year, set for a fourth straight annual loss, the longest slide since the data begins in 1991. The declines come after the index more than doubled from 2000 to a record in July 2008. By 2012, Citigroup declared the end of the commodity "super cycle," a period of longer-than-average rising prices. Goldman Sachs also said the super cycle was over last year.
The banks are getting more bearish. Societe Generale on Sept. 12 lowered its price forecasts for more than half of the 43 raw materials it tracks, and on Sept. 24, Citigroup pared its outlook on commodities including crude oil, gold, corn and wheat. Goldman Sachs is sticking with its outlook for losses in copper and gold. Abundant supplies helped push 14 of 22 raw materials on the commodity index lower this year.
The Bloomberg Commodity Index is down 11 percent since June 30, headed for the biggest quarterly decline 2011, while MSCI All-Country World Index of equities slid 2.9 percent. The Bloomberg U.S. Dollar Index, which tracks the currency against 10 major peers, has jumped 6.8 percent, the most since 2008.
Soybean meal, soybeans, cotton, corn and wheat are the five worst performers this year amid rising world inventories and heightened competition among exporters. Brent crude is set for the biggest annual loss since 2008, as ample supplies shield the market from the U.S. military campaign against Islamic State in Iraq and Syria. Copper is set for the biggest annual loss in three years. Gold erased almost all its gains this year, after slumping in 2013 by the most in three decades.
Corn fell to a five-year low Monday and soybeans were the cheapest since 2010 as farmers begin record harvests in the U.S., the largest producer of both crops. Wheat, used as a substitute for corn in feeds for pigs, chickens and cattle, slumped last week to the lowest since 2010, as world inventories climb for a second straight year. Declining oil prices are cutting costs for buyers including Delta Air Lines.
Not all raw materials are facing supply gluts. Cattle futures surged to a record Tuesday as a prolonged drought in Texas led to the smallest U.S. herd in at least six decades, government data show. Record-high prices for beef, pork and chicken are squeezing profit margins for food processors including Hormel Foods.
Arabica-coffee futures surged 76 percent this year as a drought curbs harvests in Brazil, the largest grower and exporter. Citigroup forecast Aug. 21 that the crop shortfall may leave a global production deficit lasting into 2016.
Cocoa has rallied 22 percent this year, heading for the biggest gain since 2009, on concern that supplies will be disrupted if the Ebola disease spreads from nations including Liberia and Guinea to neighboring Ivory Coast, the world's top producer and exporter.
Picking winners and losers across commodities is "increasingly important," Citigroup said in a report this month. The bank, citing supply risk, is bullish on palladium, copper, nickel, lead, coking and thermal coal, cocoa and coffee. Commodities will end 2014 in a "positive run" with nickel, zinc and lead outperformers, Deutsche Bank said Tuesday.
"There are certain markets where you see bullishness because of supply issues like cattle, nickel and coffee," said Donald Selkin, the chief market strategist at New York-based National Securities Corp., which oversees about $3 billion. "The commodities that have been going up are reacting to the particular bullish fundamentals. Even for the big three -- gold, crude oil and grains -- it's possible that the worst of the downside is over."
Paris-based Societe Generale, in its Sept. 12 report, urged investors to take short positions in gold, betting prices will drop as the Federal Reserve raises U.S. interest rates and the dollar rises. The precious metal, down 8.4 percent this quarter to $1,216.17 an ounce Tuesday in London, will slip below $1,000 "over the medium-term," the bank said.
Holdings in exchange-traded products backed by bullion are down 2.6 percent since the end of July, helping to erase $5.4 billion in value, data compiled by Bloomberg show. Money managers cut their net-long positions in gold futures and options for a sixth straight week, the longest exit in more than four years, and are the least bullish since January, government data show.
Prices fell Tuesday to an eight-month low. The Fed on Sept. 17 raised its outlook for interest rates, signaling the central bank is committed to keeping inflation in check, crimping demand for the precious metal as a hedge.
Jeffrey Currie, the head of commodities research at New York-based Goldman, says the worst isn't over for gold, forecasting prices at $1,050 by year-end. The bank also expects copper will fall to $6,200 a metric ton over 12 months because of a "major" increase in stockpiles. Copper was at $6,690 at 10:15 a.m. New York time on the London Metal Exchange.
Compounding demand concerns for commodities are signs of slowing growth in Europe. Manufacturing and services in the countries that use the euro unexpectedly slowed in September to the weakest pace this year.
The International Energy Agency has cut its forecast of global oil demand because of weaker growth in China and Europe. Rising exports from Libya and booming output in the U.S. "deepened the overhang in crude markets and overshadowed any lingering worries of potential output disruptions in Iraq," the IEA said in a monthly report on Sept. 11.
Brent crude oil fell 13 percent this year to $96.77 a barrel, while West Texas Intermediate declined 4.9 percent to $93.64.
While the U.S. economic outlook is improving, economists surveyed by Bloomberg predict China will expand 7 percent in 2015, the slowest pace since 1990. The Chinese economy has grown an average of 9.9 percent annually since 1990, according to data compiled by Bloomberg.
China's more than five-fold expansion from 1999 through 2010 left miners, farmers and energy producers struggling to keep up with demand. That attracted a surge of investment and assets under management totaled $418 billion at the end of 2012, from $271 billion at the end of 2009, Barclays Plc estimates. The assets had shrunk to $315 billion in August.
"Commodities had a boom predicated on Chinese growth," said Quincy Krosby, a market strategist at Newark, New Jersey- based Prudential Financial, which manages more than $1 trillion. "There are always these pockets of opportunities. Those typically are short periods until the event eases. When all is said and done, you need expansion, you need growth in China" to support a rally in raw-material prices, she said.
_ With assistance from Lydia Mulvany in Chicago.
