It has been a noteworthy start to 2019 for commodities. The S&P GSCI was up 1.6% in March and up 15.0% YTD. The performance of the Dow Jones Commodity Index (DJCI) was more modest in March, up 0.1%, and it was up 7.5% YTD, reflecting its lower energy weighting. Petroleum prices were the standout driver of broad commodity index performance over the first three months of the year. In contrast, the agricultural commodities proved to be a drain on overall performance, and, while investor interest in precious metals remains well above previous years, price moves have been meek. The later part of the economic cycle is typically characterized by the outperformance of commodities, particularly industrial commodities (namely energy and industrial metals). This implies that the continued strength in commodities will be highly dependent on global economic activity data remaining strong, the U.S. Federal Reserve maintaining its dovish bent, and top commodity consumers such as China continuing to support commodity-laden activity.
Oil prices posted their strongest quarterly price gain in almost 10 years in Q1 2019. The S&P GSCI Petroleum ended the month up 2.9% and up 27.1% YTD. In mid-March, OPEC scrapped its planned April meeting, declaring that it would now delay any decision to extend production cuts until June, once the market had assessed the impact of U.S. sanctions on Iran and the crisis in Venezuela. However, it is clear that cracks in the OPEC Plus union are emerging. OPEC’s de facto leader Saudi Arabia favors cuts for the full year, while Russia, which joined the agreement reluctantly, is seen as less keen to restrict supply beyond September. While supply has been the main driver of the recent price appreciation, it is worth recalling that demand is what led to the sizable price decline in the final months of 2018. There are nascent signs that Asian demand has stabilized, but there are growing concerns regarding European demand.
Performance across the industrial metals complex was more disparate, leaving the S&P GSCI Industrial Metals flat for the month. The rise in commodities this year has been partly fueled by hopes for an agreement to end a trade war between the U.S. and China. Zinc and nickel were the standout beneficiaries of such growing expectations, and, combined with critically low inventory levels, this pushed the S&P GSCI Zinc and S&P GSCI Nickel up approximately 21% YTD. Aluminum is the laggard industrial metal YTD, and the S&P GSCI Aluminum was down 0.2% in March and up a relatively meek 3.4% YTD. Investor concerns regarding rising aluminum supplies have been heightened since the Russian aluminum giant Rusal resumed sales to the U.S. market, following its removal from the U.S. sanctions list.
A stronger U.S. dollar, growing expectations of a trade deal between the U.S. and China, and a general rise in investors’ risk appetite all contributed to gold posting its second consecutive down month in March (down 1.6% for the month and up only 0.9% YTD). These factors were more than sufficient to offset any support from the apparent end of interest rate increases in the U.S. Gold is traditionally seen as a safe place to invest during periods of uncertainty; higher interest rates hurt gold because they make bullion, which pays no yield, meaning it is less attractive to investors, while a stronger U.S. dollar can depress demand by making gold more expensive for buyers in other currencies.
As is often the case, the release of the USDA’s Prospective Plantings report on the last trading day of the first quarter accounted for the bulk of the excitement in the agricultural markets in March. The USDA pegged U.S. corn plantings 1.5 million acres higher than the market expected, and domestic corn inventory halfway through the 2018/2019 marketing year came in 270 million bushels heavier than predicted. The S&P GSCI Corn ended the month down 3.7%. The USDA placed March 1, 2019, soybean stocks at record levels, while soybean acres came in 1.55 million below the trade estimate, but the S&P GSCI Soybeans still ended the month down 2.7%. The only bright spot in the agricultural sector in March was cotton, with the S&P GSCI Cotton up 6.8% for the month and up 6.2% YTD, reflecting the USDA’s forecast for considerably lower cotton acres. Grain market participants will now turn their focus to the planting season and specifically the impact, if any, of recent flooding on planting progress and the final U.S. acreage mix.
The standout performer across the commodity complex in March was lean hogs, with the S&P GSCI Lean Hogs up 23.8% for the month and up 6.9% YTD, pushing the broader S&P GSCI Livestock up 5.5% in March and up 3.9% YTD. Lean hogs spent the first two months of the year in the doldrums fixated on higher-than-expected levels of U.S. pork production and ongoing market access restrictions for U.S. pork in key export markets. By March, these factors were dwarfed by the realization that the scope, severity, and impact of the African swine flu outbreak in China had potentially been greatly misunderstood.