Lumber prices are back down to levels we have not seen since the COVID outbreak in 2020, at $339 per thousand board feet.JENNIFER GAUTHIER/The Globe and Mail
At the Federal Open Market Committee meeting early this month, the U.S. central bank raised its benchmark interest rate by a quarter of a percentage point to a target range of 5 per cent to 5.25 per cent. That was the 10th increase in the rate since March of 2022, and it now sits at its highest level since 2007. The committee meets again in June. The bond market is predicting it will not raise rates any further (the current consensus is a 21-per-cent likelihood of another quarter-point increase) and the market is actually forecasting three similar rate cuts by year-end. However, the committee expects it will not cut rates in 2023 unless it needs to respond to a fairly severe recession.
The dynamics of all of this directly affect commodities: Will we have a soft landing with minimal economic impact or will we enter a recession leading to falling commodity demand and prices? The cumulative interest-rate increases, coupled with the recent failures of regional banks in the United States, have also led to a credit-tightening cycle – another recession harbinger.
Let’s look at how some commodity prices have moved over the past month and their outlook.
Copper has moved down 8 per cent in the past month and is now trading at US$3.75 a pound, down from US$4.30 in late January. A slower economic opening in China, the world’s leading copper consumer, accounts for most of the decline. Conversely, copper inventories at the Shanghai and London metals exchanges are at their lowest levels this year in Shanghai and since 2005 in London. Recession fears are playing out against low inventories for copper, which tells us prices will be volatile going forward.
Wheat prices dropped to a two-year low on May 2 as supply continues to improve. Global wheat production is expected to increase five million tonnes from the previous year to 789 million tonnes. In the United States, a larger planted area along with spring rains have driven up production expectations by 8 per cent. Canadian wheat production is also forecast to be up by 4 per cent in 2023 on the back of more planted area. After two days of negotiations, Russia has agreed to extend the Black Sea grain deal for a further 60 days. The deal allows the passage of Ukrainian wheat, corn and other commodities through the Black Sea to global markets. This extension will allow a further 30 million tonnes of grain to be exported from Ukraine.
The price of West Texas Intermediate oil has been trading between US$65 and US$85 this year and is currently hovering around US$70. A number of factors have been keeping the price down, including recession and inflation fears, rate hikes, China not reopening as strongly as predicted and the U.S. debt-ceiling discussion continuing. On the other side of the equation, OPEC production cuts coming into effect (a production cut of 1.2 million barrels a day was announced in April) as well as the start of the summer driving season exert upward pressure on prices. OPEC meets again on June 4, but we don’t ultimately know what it will do at that meeting. Russia has also stated it has cut production by 500,000 barrels a day and will continue producing at that level through 2023. Given May is traditionally the lowest-demand month of the year for oil we would expect prices to find a bottom here and move up over the summer months.
Lumber prices are back down to levels we have not seen since the COVID outbreak in 2020, at $339 per thousand board feet. The same story of higher interest rates and recession fears is driving prices down in an environment that tells us there is a housing shortage of between four million and seven million units in the U.S. Companies have shifted to production curtailments over the past two years as a way to put a floor on prices and we are now well below the average cost of production for West Coast lumber ($450-$500 per thousand board feet). If we have a soft economic landing, we could see a sharp rise in lumber prices later in the summer.
Price expectations for most commodities are still being driven at a macro level by inflation, interest rates, recession fears and credit tightening. Commodity markets will continue to be volatile through 2023 as this inflation/recession battle plays out.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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