Only ags survive the commodity decline H1

London, 29 June 2012

Commodities are closing out the second quarter under continued pressure due to increasing global economic growth concerns. Only the agriculture sector has performed positively, on the back of worsening drought conditions in the U.S. grain belt, confirms Mike McGlone, Senior Director, Commodity Indexing, S&P Indices.

Fears of declining global economic growth, notably in Europe, China and India, continued to pressure commodities in June, resulting in a Q2 loss of 17.06% so far, in the S&P GSCI (as of June 28)

• Energy has been the biggest drag on index returns, as measured by the 22.74% decline in the S&P GSCI Energy index so far in Q2, led lower by crude oil and Brent crude on the back of increasing supplies, notably from Saudi Arabia and the U.S.
• Agriculture and livestock were the only major sectors to increase in June and in Q2
• Due to worsening drought conditions in the U.S. grain belt, agriculture prices have surged in June, as measured by the 13.94% month-to-date increase in the S&P GSCI Agriculture index making it the only positively performing major commodity sector YTD
• Corn has been the best performing commodity in June as measured by the 24.96% increase in the S&P GSCI Corn index.
• Crude oil has been the worst performing commodity in June as measured by the 10.53% decline in the S&P GSCI Crude Oil index

Drought and Backwardation Heat up the Grains

Fears of declining demand for commodities on the back of reduced global GDP estimates and increasing supplies, notably petroleum, continued to take their toll on most commodities in June. However, Mother Nature helped to backstop the market by providing some sizzle in the agriculture sector.

Worsening drought conditions in the U.S. grain belt sparked a surge in the price of corn, soybeans and wheat on the back of rapidly diminishing 2012 yield estimates.  The S&P GSCI Agriculture index ending June 28 with a YTD total return increase of 3.92%, compared to a spot price decline of 0.57%.  The slight YTD spot price decline indicates overall food costs have barely budged in 2012, but the positive total return increase better measures the return most investors receive due to rolling into backward-shaped futures curves.  Backwardation is the condition when further out futures trade at lower prices and generally reflects markets with tight supply/demand conditions.

Corn and soybeans have been the main drivers of agriculture returns, as measured by the YTD increases of 8.02% in the S&P GSCI Corn and 23.19% in the Soybean indices.  The spot S&P GSCI Corn index posted a YTD decline of 3.13% and the spot S&P GSCI Soybean index had a gain of 16.21% as of June 28, resulting in positive roll yields of about 11.15% for corn and 6.98% for beans.  Commodities are always about supply and demand in the long term, operating cyclically, along with the structure of the futures term structure.  With a boost from Mother Nature, the grains entered into a more severe supply-deprived market in Q2.

S&P GSCI and S&P GSCI Agriculture Index TR Performance:

December 2010 – June 28, 2012

June Total Return: -4.20% (-12.18% YTD - All returns are total returns unless otherwise noted)

Source: Standard & Poor’s, Bloomberg. Data as of June 28, 2011.  Graphs are provided for illustrative purposes only.  Past performance is not a guarantee of future results.

Ends --