Commodities Market

The global economy did grow over the past 18 months, but production growth has
continued to decelerate over this period, and significant spare capcity is evident. In
China, the major buyer of a broad range of commodities, mean annual production growth
over the past decade has averaged 15% per annum. however, even with the recent pick
up in production growth to 10% yr/yr, China likely is growing along with depressed
operating rates. Slower global growth and significant excess capacity in China has
continued to pressure commodities prices. CRB Commodities Composite

There was a burst of improvement in the CRB in the early summer of 2012 as the Fed
began to talk up further QE. At about the same time, China's production growth trend
bottomed and began to improve at a modest pace. The decline in the CRB Index to the
270 level did provide a nice long side trade starting in June, but the market has given
up a fair amount of ground since in the absence of a re-acceleration of global growth.

By my stripped down econometric model, there is presently economic slack with the CRB
trading below the 320 area. With considerably stronger global production growth, the model
suggests the CRB should trade between 320 - 380 during 2013. With the index now at
295, it is evident that more slack needs to come out of the system and that speculative
financial interest in this market remains well muted now despite various QE programs.
The indicators for the CRB have a slight positive bias and interestingly, the index is putting
in a short term base right under the 50 and 200 day m/a's. It is distressing that with the
recent popularity of the "risk on" trade, the CRB has yet to again reverse to the upside.
There are many financial market types who have speculated in this market over the past 5-7
years, and, given its volatility, there are probably many cases of "burned fingers". Keep an
eye on it.