Commodities Now – London, 25 June 2011

The sharp decline in energy prices on the back of the first coordinated global release of strategic petroleum reserves (SPR) since hurricane Katrina in 2005 pressured the S&P GSCI to post the worst monthly loss since May of 2010.

The S&P GSCI ended June 23, down 8.15% on the month which reversed a YTD gain to a loss of 0.38%.  Energy was the leading driver of S&P GSCI losses in June as measured by the 9.89% decline in the S&P GSCI Energy Index which lessened the YTD gain to 1.32%.

Livestock was the only major S&P GSCI sector to post gains in June as risk reduction, dollar strength and global economic concerns pressured most commodities as reflected by the June decline of 4.22% in the S&P GSCI Non-Energy Index resulting in a YTD decline of 3.83%.

Energy - SPR Release Adds Pressure

Prior to the surprise announcement of the coordinated global release of SPR's on June 23, the S&P GSCI Energy Index was already down 5.23% MTD as of June 22, under pressure from signs of economic weakness.

Much of the recent signs of economic decline have been attributed to spikes in energy prices which have had a detrimental impact on consumer spending.  Unleaded gas is the commodity most directly impacting U.S. consumers and year-to-date, the S&P GSCI Unleaded Gas index ended June 23, with a gain of 12.03% for a 12-month increase of 37.37%.  The SPR release has helped to provide some relief though as the S&P GSCI Unleaded Gas Index ended June 23 with a MTD decline of 8.48%.

Despite the June decline in energy, the 2011 commodity story remained about higher energy prices as measured by the YTD spot price increase of 5.63% in the S&P GSCI Energy Index compared to a YTD spot price decline of 3.11% in the S&P GSCI Non-Energy Index.

Agriculture - Wheat and Corn Suffer, Sugar Up

The S&P GSCI Agriculture Index declined 7.65% in June on the back of weakness in wheat in corn resulting in a YTD decline of 6.20%. Increasing exports from Russia and better than expected progress of the winter wheat harvest has pressured wheat prices in June as measured by the agriculture sector leading 18.58% decline in the S&P GSCI Wheat Index.

Increasing political pressure to reduce the U.S. ethanol subsidy has pressured corn prices after reaching historic highs ever earlier in the month.  On June 10, the front corn future closed at US $ 7.87/bu which was the highest price ever and approximately 15 cents above the, then current, price of wheat.  Historically, when corn has traded above the price of wheat, lower prices have generally followed.  The summer of 1996 was the last time the price of corn exceeded that of wheat.  The S&P GSCI Sugar Index was the best performing S&P GSCI single commodity index in June as measured by the 17.24% MTD gain - a direct beneficiary of the potential reduction in the U.S. corn based ethanol subsidy.

Metals - Continued Divergence

As of the June 23, both the S&P GSCI Industrial Metals and Precious Metals Indices have posted MTD declines of 3.95% and 2.36% respectively but the 2011 metals story remains about the divergence in prices, i.e. weakness in the industrial metals and relative strength in the precious metals which can be considered a disconcerting signal for economic prospects.

Year-to-date, the S&P GSCI Industrial Metals Index ended June 23 with a decline of 5.19% compared to an increase of 7.66% in the S&P GSCI Precious Metals.  U.S. Dollar weakness has generally helped the price of the U.S. Dollar based assets, certainly the easy to store metals, as measured by the YTD decline of 4.53% in the U.S. Dollar Index which was lessened by a 1.12% gain in June but the end of QE II seems to also be a concern of the market.

QE II was announced on August 27 2010.  Since August 26, 2010, until June 23, 2011, the U.S. Dollar Index declined 10.54%, the spot S&P GSCI increased 29.14%, the S&P 500 increased 24.58%, the S&P Industrial Metals Index increased 19.31% and the S&P GSCI Precious Metals Index increased 29.04%.

Livestock - Continued Divergence

The S&P GSCI Livestock Index ended June 23 with a MTD gain of 7.36% on the back of reduced supplies and strong export demand. Drought induced ranchers to sell off herds earlier in the year which pressured prices but increased export demand in the midst of diminished supplies has helped to boost prices in June.

Ends --

By Michael McGlone, Senior Director of Commodity Indices at S&P Indices.