Commodity market trend

The commodity rally that began in 2021 and continued through the first half of 2022 subsided in the second half of 2022 and into 2023.

Higher-than-normal inflation was one of the main drivers of the strong commodity performance, and those numbers began to cool from the highs reached in previous years.

According to Columbia Funds Series Trust II, the downward trend in inflation, combined with additional time to resolve supply chain issues left over from the initial challenges of the Covid-19 pandemic, led to a decline in commodity prices across the board.

Although the Russian invasion of Ukraine has continued, concerns about the distribution of agricultural products from Ukraine have abated.

The restriction of port activity from Ukraine took place between March and August 2022, after which Ukraine, Russia, Turkey and the United Nations signed the Black Sea Grain Initiative.

Thus, the Black Sea routes were reopened, and corn and wheat exports from Ukraine returned to seasonal average levels.

But in mid-July, Russia announced that it was withdrawing from the agreement for grain exports across the Black Sea, which allowed for the continued flow of food from Ukraine to more than 40 nations.

One issue that remains crucial for future commodity prices is how quickly China will continue its policy of reopening after its Covid-19 zero-lock.

Commodities

China’s blockade led to a significant cut in demand for metals and energy, as much of the country’s real estate development projects were put on hold and travel across China came to a standstill.

A successful reopening of China could lead to a rebound in demand in various commodity sectors, providing a catalyst to balance supply and demand effects. But so far, this reopening has not had great traction.

Most commodity subsectors posted negative returns for the year ending May 31, 2023, with energy and industrial metals lagging behind.

Within energy, natural gas was a major laggard, mainly due to reduced demand needed to heat homes as a result of a mild winter.

Industrial metals were negatively impacted by the production bottleneck in China, which led to a halt in production in the Chinese real estate sector, which in turn reduced demand for most industrial metals.

In general, agriculture recorded negative returns, but within the sector some commodities such as sugar, cocoa and coffee obtained a negative performance.

Precious metals posted positive returns during the period, led by the strong performance of gold, which accounts for a large percentage of the benchmark’s precious metals exposure.

Finally, livestock was another sub-sector with positive results overall, led by the performance of live cattle, although lean hogs lagged.