At The Halfway Point: 2015's Best Commodities
After six months, 26 weeks, or 180-odd days, half of 2015 lies in the history books while we've got only six months left before we have to remember to sign our checks with 2016 as the date. While 2015 hasn't been as poor a year for commodities as 2014 -- the functional equivalent of the 2008 investment year for the stock market -- there's been more disappointing performances than standout performances. In the half of the year to date, what has been the good, the bad, and the ugly regarding the commodities market?
The Good: Oil
The slow uptick of gasoline prices, in some states rising back above $3 per gallon, may leave you surly at the pump. If you carry oil in your portfolio, however, you're more than happy to see the price signs outside of gas stations climb up and up. Oil took it on the chin in 2014, dropping to ten-year lows and creating a series of economic reverberations throughout the globe, including pushing fracking to the limit of profitability and bringing the Russian economy nearly to its knees. Reformulated gasoline trades for a huge amount on the futures market (RBN5 on the NYMEX trading for $2.05 a share), having gained fifty percent in value over the last six months. Crude price rebounds have provided the impetus for an energy renaissance; the current price of $62.42 a barrel may look unimpressive to investors used to triple-digit prices but represents a 15% growth since the start of the year.
The Bad: Sugar
In a world run on sugar, the strict relationship of supply and demand dictates a price fall as this agricultural cash crop becomes the most popular kid on the block. Sugar grew throughout the first six months of 2014 based on limited supply; sugar has declined throughout the first six months of 2015 based on vastly increased supply. Agricultural producers have found sugar to be an easy sell to farmers across the globe thanks to the relative lack of care needed to tend sugarcane, a famously hardy plant provided it receives enough sunlight and water. Just as importantly, nations like India and Brazil have developed agricultural subsidy programs in order to replace subsistence farming with cash crop farming, developing more and more sugar growth to compete on the global market. Sugar has lost nearly 20% of its total value on the commodities market (SBV5 on the ICE Futures trading for $.11 a share) thanks to bumper crops around the globe.
The Ugly: Platinum
Platinum hit a five-year low in March of 2015 after enjoying a sizzling-hot 2014 fiscal year. The problem with platinum lies in its availability: of the 150,000 kilograms mined annually, over two-thirds of that figure come from South Africa; second-place Russia mines only 25,000 kilos. As such, South Africa politics and economics dictate the international price of the precious metal, and good news for one often means bad news for the other. Despite the fact that South African mining writ large has had serious setbacks of late, they've negotiated a conclusion to the strikes at platinum (and palladium) mines that created serious shortages and price spikes. Platinum has lost 10.4% this year as South Africa reports increased production at their major mining facilities, putting platinum back on the market and reducing its value significantly. Without future mining strikes or shortages in the future, platinum represents a risky metal for investment.
The Good: Cocoa
Nothing poses a risk to the American institution of Halloween like the very real risk of "peak chocolate." The world consumes more and more chocolate each year despite the fact that growing space for this delightful bean faces serious problems going forward. Those with a sweet tooth may need to switch to jelly beans if further arable land cannot be developed or maintained for cocoa bean plantations; those with cocoa commodities in their portfolio will find the downturn sweet for a whole other reason. Cocoa has risen by nearly double-digit margins in 2015, continuing a steady spate of growth for the bean over the course of the past three years. At the same time that coffee and sugar experience record harvests, cocoa faces shortfalls as land development in conflict regions minimizes output. Cocoa represents a fantastic long-term investment: not only will supply fail to scale relative to demand, but it's only lost net value for two of the past ten years.
The Very Bad and Very Ugly: Coffee
Those who cannot start the day without a cup of Java have watched the price of their caffeine source tumble through 2015 thanks to the same factors affecting sugar prices. Coffee has lost over 20% of its value this year, by far the worst performer of any commodity in agriculture, metals, or energy. The problem with coffee echoes problems of other commodities: we've got more available than the world actually wants to consume. The last coffee harvest broke the record books and projections for the next coffee harvest appear just as robust. Coffee hit a high point in January of $1.84 per pound and it's been downhill ever since, trading today for just $1.31 per pound. Investors who have put coffee commodities into their portfolio sit between a rock and a hard place, facing the choice of selling low or watching their investment drop further. Those who haven't, on the other hand, can buy in now at an ultra-low price.
Conclusion: The Stretch Run
The good, bad, or indifferent performances of many commodities will likely continue throughout the last six months of 2015 much as they did for the first six months, for several reasons. Many energy commodities appear set to rise further given the 2014 low prices forced a number of companies out of business and decreased overall supply. One exception: coal, which remains in freefall. The uninspiring performance of precious metals indicates a general lack of demand as world consumers, most notably China, slow down their intake. One exception: silver, which enjoys a variety of industrial applications that have given the metal a 2% boost in 2015. The factors that drive agriculture commodities up or down remain set as over-harvesting or under-harvesting push prices up and down. One exception: feeder cattle, which haven't moved much in either direction thanks to strong export markets hedged against poor domestic consumption.