JUST a year ago the debate about grain prices was simple: how high was high?

Huge global demand for grains, governments hoarding food, climate fears amid droughts, storms and floods, basically every bullish factor one could imagine hit the markets.

The psychology of short supplies carried over to other commodities as well, especially industrial metals as China and India drew in a rapidly rising share of materials as their economies raced to modernise and transform.

The final element for the “perfect storm” sending commodities to stratospheric heights was the tsunami of Wall Street and other speculative money that, frustrated by stagnant stocks and bonds, finally bought into the commodities story.

The benchmark Reuters Jefferies CRB index of 19 commodity futures was at 358.71 on Dec 31, 2007, up 17% for the year. It jumped another 32% to hit record high of 473.97 on July 3, 2008.

Then, as investors blinked, it was over. The index started sliding and by early December fell to a 6½-year low of 208.58, down 56% from the mid-summer highs.

The global economic crisis tied to dried up bank credit – the lifeblood of all markets – rocked Wall Street but also rolled over commodities, bursting bubbles right and left.

”A great start and an unexpected finish,” said Rich Feltes, director of MF Global Research in Chicago.

Gold had soared past US$1,000 an ounce. US wheat prices had gone past US$25 a bushel – the previous record was $7.50 – amid a 60-year low in US wheat stocks. Midwest floods and a biofuels boom pushed corn above US$7 a bushel, triple the average price for decades. In July, crude oil neared US$150 a barrel.

“The main negative for all of these commodities is the demand side of the equation with the economic malaise,” said Bill O’Neill, managing partner of Logic Advisors LLC and former head of commodities research at Merrill Lynch.

The question for the coming year? How low is low?

“As we head into 2009 I think an important question to ask is will that fund money come back?” MF Global’s Feltes said.

“Commodities are not going to be a lead indicator,” he said, pointing to gross domestic product instead. “The economy has to turn around first. There has to be fundamental justification for higher GDPs for improving commodity demand before investors feel comfortable coming back to commodities.”

In US commodity markets, weekly data from the Commodity Futures Trading Commission has told the story of shell-shocked investors fleeing commodities or cashing out to secure funds.

Open interest in the CBOT’s largest contract, corn, for example, had grown to 1.4 million contracts by spring. Today, the total is 800,000 contracts as commodity funds downsized to meet the global margin call that came as economies collapsed.

The credit contagion shows no signs of being solved any time soon, with the hopes of most investors pinned to the new policies and measures a Barack Obama administration says it will aggressively put in place starting in January.

How quickly that might spur economic growth and investor confidence is an open question. But among commodities, one place to keep an eye on may be grains. Several factors might make food and biofuels a trigger for a commodities recovery.

For one thing, the single biggest demand force in the recent commodities craze – China – is not going away. Neither is food or biofuels demand, although the latter may cool down.

“The theme we’ve had in the last half of this year was all about demand destruction,” said Dan Basse, president of Chicago-based consultancy AgResources. “We’re concerned about supply destruction starting mid to late winter and having a bull market in agriculture the last half of 2009.”

Basse said supply destruction referring to lower global grain plantings was a key to watch. But so are biofuels.

Obama, from a top corn and soybean state, has promoted biofuels. But using food crops to produce them has been increasingly attacked by food inflation watchers and even environmentalists, saying it does little for global warming.

“Ethanol has been one of the big drivers of the bull market,” Basse said.

Another factor that will have a huge influence over whether commodity prices recover is the value of the dollar. A weak dollar makes US grain exports cheaper, for example.

“The US dollar will continue at least early in the year to drive all commodity markets,” said Bill Lapp, president of consultancy Advanced Economic Solutions. – Reuters

The Star

HOUSTON (AP) - Crude prices tumbled Wednesday following a raft of bad economic news and growing stockpiles of unused gasoline that suggested demand for energy has continued to erode.

Light, sweet crude for February delivery fell $3.63 to settle at $35.35 a barrel in a shortened day of trading. Prices fell as low as $35.13 just before the market closed for the holiday.

It was the ninth straight day that crude has fallen.

Investors expecting more evidence of slowing U.S. energy demand got a bit of a surprise as the Energy Department reported crude inventories dropped last week.

But Americans continue to cut back on driving amid the worst recession in a generation, leading to growing stockpiles of gasoline and eroding demand for motor fuel.

Gasoline futures plummeted below 80 cents a gallon.

"I don't see anything out of this report that's really going to change this downward move,'' said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.

"Things are going to remain under downside pressure through the balance of this year and probably into the new year.''

A steady stream of dismal U.S. economic and corporate data during the past few months has hammered investor confidence and sent oil prices reeling 74 percent since July.

More bad news emerged Wednesday with consumer spending falling for a fifth straight month in November, the longest weak stretch in a half century, while incomes declined under the weight of massive job layoffs.

Separately, new claims for unemployment benefits rose more than expected last week, as layoffs spread throughout the U.S. economy, more evidence the labor market is weakening as the recession deepens.

The Labor Department reported initial requests for jobless benefits rose to a seasonally adjusted 586,000 in the week ending Dec. 20, from an upwardly revised figure of 556,000 the previous week.

That's much more than the 560,000 economists had expected.

Manufacturers are slashing energy use as well. Orders at U.S. factories for big-ticket manufactured goods fell again in November, reflecting further setbacks in the battered auto industry and a big drop in demand for commercial aircraft.

For the week ended Dec. 19 crude inventories fell by 3.1 million barrels, or 1 percent, to 318.2 million barrels, which is 9.1 percent above year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.

Analysts had expected a boost of 1.5 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Gasoline inventories rose by 3.3 million barrels, or 1.6 percent, to 207.3 million barrels, which is 2.4 percent below year-ago levels.

Analysts expected stockpiles of the motor fuel to rise by 900,000 barrels.

Demand for gasoline over the four weeks ended Dec. 19 was 2.7 percent lower than a year earlier, averaging nearly 9 million barrels a day.

In a separate weekly report, the EIA said natural gas storage levels in the U.S. tumbled last week but remain 3.4 percent above the five-year average for this time of year.

The EIA said natural gas inventories held in underground storage in the lower 48 states slipped by 147 billion cubic feet to about 3.02 trillion cubic feet.

Analysts had expected a drop of between 142 billion and 147 billion cubic feet.

Oil traders so far have brushed off attempts by OPEC to boost prices through production cuts.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, said last week it would slash production by 2.2 million barrels a day, its largest single cutback ever.

The most recent round of cuts would reduce OPEC production by more than 2 million barrels per day.

OPEC may meet in Kuwait City on Jan. 19 to discuss further production cuts.

The group's next official meeting is March 15 in Vienna.

The fall of benchmark crude on the Nymex has been paralleled by steep declines in Brent futures traded on London's ICE exchange.

Trader and analyst Stephen Schork noted that Brent crude has dropped "in 79 of the last 123 sessions ... by a total of $108.05 a barrel'' - a 73 percentage point loss.

On Wednesday, February Brent crude slumped $3.75 to settle at $36.61 a barrel on the ICE Futures exchange.

In other Nymex trading, gasoline futures tumbled by 6.3 cents to settle at 79.27 cents a gallon.

Heating oil plunged 12.8 cents to settle at $1.1983 a gallon while natural gas for January rose 17.3 cents to settle at $5.91 per 1,000 cubic feet.

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NEW YORK (AP) - Gold prices inched higher Wednesday in a shortened session as investors looked past discouraging economic reports and made small bets on the metal.

Economic concerns have pressured many commodities prices in the past few months, particularly energy, as investors fear a prolonged recession will lead to further declines in demand.

But gold prices have been able to attract moderate investment demand in recent weeks, boosted by the prospect of rising inflation. Investors often use commodities, especially gold, as a hedge against a weak dollar.

Price movements have been relatively modest though. The contract has traded within a tight range of about $60 since earlier this month.

"Given how far other things have fallen, gold has held up pretty well,'' said Stephen Platt, futures strategist, with Archer Financial Services.

"You are seeing some shifting of interest from some sectors back into gold.''

Gold for February delivery rose $9.90 to settle at $848 an ounce on the New York Mercantile Exchange.

March silver gained 9 cents to $10.35 an ounce, while March copper futures slipped 0.7 cent to $1.2740 a pound.

Many financial markets closed early for Christmas Eve.

On Wall Street, stocks made a modest advance despite government reports showing an increase in U.S. joblessness and a decline in consumer spending.

Investors have largely factored in bad numbers for the fourth quarter, analysts say, so the figures didn't come as a surprise.

The Dow Jones industrial average finished up about 49 points at the 8,468 level.

The dollar was mixed against other major currencies, while the yield on the benchmark 10-year Treasury note rose slightly to 2.19 percent from 2.18 percent late Tuesday.

Energy prices tumbled on the Nymex, still plagued by demand concerns.

Light, sweet crude for February delivery fell $3.63 to settle at $35.35 a barrel.

In other Nymex trading, gasoline futures slipped by 2.5 cents to 83 cents a gallon, while heating oil fell 4.4 cents to $1.2826 a gallon.

Grain prices gained on the Chicago Board of Trade.

March wheat futures rose 7 cents to $5.8225 a bushel, while corn for March delivery rose 3.25 cents to $3.98 a bushel.

March soybeans rose 14 cents to $9.19 a bushel.

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LONDON (AP) - World stock markets were mixed in lackluster Christmas Eve trading Wednesday, finding little holiday cheer in the latest data on the slumping U.S. economy.

Wall Street managed to shrug off readings on rising U.S. joblessness and declining consumer spending, with the Dow Jones industrial average finishing a shortened session up 48.99 points, or 0.58 percent, to 8,468.48, after falling for five straight sessions.

The blue-chip index is well off its November lows, but is still down for the typically strong month of December.

The Labor Department said initial applications for unemployment benefits rose more than anticipated to a seasonally adjusted 586,000 last week.

The Commerce Department, meanwhile, said consumer spending dropped 0.6 percent in November - the fifth straight monthly drop - and durable goods orders fell 1 percent in November.

In Europe, Britain's FTSE 100 index closed down 0.9 percent at 4,216.59 after a shortened trading day, while France's CAC-40 ended down 0.4 percent at 3,116.21.

Germany's stock market was closed.

British drug maker AstraZeneca's shares fell 3.1 percent after it disclosed it had received a request for more information from the U.S. Food and Drug Administration on its application for new uses for its Seroquel anti-psychotic drug.

In Latin America, Mexico's IPC index closed a shortened session up 0.8 percent at 22,341, while Chile's IPSA ended barely changed, up 0.1 percent at 2339, also in a shortened session.

Markets in Argentina and Brazil were closed for the holiday.

Earlier, Japan's Nikkei 225 stock average dropped 206.68 points, or 2.4 percent, to 8,517.10, after being closed Tuesday for a holiday.

Shares in Toyota Motor Corp. tumbled 4 percent in their first trading day since Monday, when Japan's biggest automaker said it expected to post its first operating loss in almost 70 years this fiscal year.

Wednesday's news that Toyota's global sales plunged almost 22 percent in November added to the sector's gloom, dragging down car companies around Asia.

Many investors in Asia found little reason to buy after reports released overnight in the U.S. showed no signs of a turnaround in the world's largest economy, already in recession.

The government said gross domestic product, the broadest measure of the economy, shrank at an annual rate of 0.5 percent in the third quarter.

America's hard-hit housing sector also continued to deteriorate.

New home sales weakened last month to the slowest pace in nearly 18 years, while prices of new homes dropped by the biggest amount in eight months. Sales of existing homes weakened.

Hong Kong's Hang Seng Index closed down 0.3 percent to 14,184.14, while South Korea's Kospi lost 1.4 percent 1,128.51.

"The end-of-the-year, bear-market, feel-good rally is ending sooner than many expected,'' said Kirby Daley, senior strategist at Newedge Group in Hong Kong.

"Investors are being hit in the face with the reality of just how bad the U.S. economy is and they're seeing firsthand the effects this is having on the consumer and, as a result, companies like Toyota and U.S. retailers,'' he said.

Elsewhere, Shanghai's benchmark lost 1.8 percent and India's main stock measure lost 1 percent; key indices in Australia, Taiwan and Singapore gained.

Worries that demand would sink further well into 2009 pulled car companies lower. Honda Motor Co., Japan's No. 2 automaker, plummeted 5.7 percent, while South Korea's Hyundai Motor Co. shed 2.4 percent.

Oil prices continued to erode in the face of the litany of weak U.S. economic data.

Light, sweet crude for February delivery fell $3.63 to settle at $35.35 in a shortened day of trading.

Prices fell as low as $35.13 just before the market closed for the holiday. It was the ninth straight day that crude has fallen.

Meanwhile, the dollar fell against most major currencies in light holiday trading. The euro rose to $1.3999 in late New York trading, up from $1.3967 late Tuesday, while the British pound edged up to $1.4752 from $1.4735.

The dollar fell to 90.39 Japanese yen from 90.68.

In addition to markets in Europe, the U.S. and Latin America, many across Asia will be closed Thursday for Christmas, including Hong Kong, Singapore and Australia.

Japan's stock market, however, will be open.

Economic performance will determine strength

PETALING JAYA: The volatility of the global equity and financial markets in the past months has make it hard to predict what currencies to invest in.

This is especially as governments worldwide cut key interest rates to boost their economies and their currencies are, in turn, affected by the loose monetary policies.

“For 2009, the determinant for currency strength will be economic performance,” AmBank Group FX and interbank senior manager Yee Ming Shen told StarBiz.

He said any economy that recovered first should be targeted.

“It is not easy to predict which currencies are going to be the ones to look out for at this point because the economic slump and financial crisis are far from over,” Yee added.

He said currencies were being used as “tools” to manage the economy and “it is close to impossible to know where they’re headed at this time”.

“It will be a tough year for currencies whose strength is based on commodities while the Japanese will prefer their currency to be weak to boost exports,” Yee said, adding that this might fuel more speculation on the yen carry-trade.

A currency exchange worker holds a handful of euro notes. - AFP

The yen carry-trade is the strategy of borrowing money in yen due to its low interest rates and then converting it into another currency. Japan’s historically-low interest rate was recently cut to nearly zero again after its economy slipped into recession.

According to Bloomberg, quoting an economist with Moody’s Economy.com, the won and rupee would be Asia’s biggest gainers from improved appetite for emerging market assets and a recovery in global economy.

The won and rupee have plunged over 30% and 19% respectively against the US dollar while foreign funds have sold US$37bil worth of South Korean stocks and more than US$13bil of Indian equities.

The economist said India had a strong domestic market with strong growth potential and was one of the most attractive destinations for foreign direct investments.

Meanwhile, Citigroup Inc vice-president for Asia-Pacific economics and market analysis, Kit Wei Zheng, said the global economy was going through a sustained downturn and this had affected local exports.

On Malaysia, he said that from a purely fundamental perspective and ignoring any interest rate cut angle, the current market situation did not really favour a strong ringgit. “In the kind of environment where growth is very weak, I don’t think Bank Negara will allow it to happen.”

Furthermore, the ringgit traded broadly in line with the Singapore dollar and, at this point, the Monetary Authority of Singapore would prefer a weaker dollar, AmBank Group FX’s Yee said.

“The ringgit outlook depends on how the Singapore dollar is faring since both currencies trade within a narrow range and Singapore is Malaysia’s second-largest trade partner,” Yee added.

The Star- Fintan Ng