CRB Index Vs. Emerging Markets

I talked about how the emerging markets and especially China depend on commodities. If China does well, the commodities will do well. The mining industry (example Australia) will follow this trend. This means that the CRB index is correlated to the emerging markets.

This is illustrated by a nice chart from Ed Yardeni.

Apparently Ed believes the commodity supercycle has reached its end since 2011, contrary to what Peter Schiff believes. I do think that the mining industry had a huge boom since 2000 and is now in the process of unwinding. Commodities have been flat because the U.S. dollar was strong. But I don’t think the Western world is in such a good shape as Ed thinks, that’s why I think this commodity cycle is not over yet.

Correlation between Industrial Production Vs. CRB Metals Index

Thanks to Bob Garino, who commented on this article, I found out about the correlation between Industrial Production (manufacturing) and the CRB metals index.

Let’s see if this correlation is correct.

I immediately see that from 1990 till 2000 the correlation doesn’t fit. That period was a period where miners were in a bear market as metals prices declined and mining companies were getting worse and worse conditions for mining. Bonds were doing ok in that period.

So I’m a bit sceptical about this correlation. But I’ll still add it to my list of correlations.

Chart 0: Industrial Production: Manufacturing

Chart 1: Industrial Production Index

Chart 2: CRB Metals Sub-Index

Status on the CRB Index

Just recently, sentiment in the commodity market has been positive. Capacity utilization improved, the CRB index started to move upwards, chances on QE3 are improving, the dollar index moves into a top formation. In this article I will discuss the prospects in each sector of the CRB index.

On Tuesday 17 July 2012 the capacity utilization rate came in at 78.9%, up from 78.7% the previous month. As I noted here, the capacity utilization rate is a leading indicator for inflation. This inflation will start to be visible next year as there is a lag between the capacity utilization rate and commodity prices.

The different sectors in the CRB index composition are: petroleum, agriculture, metals and natural gas. I will analyse them one by one in this article.

Chart 1: CRB Index

Agricultural Commodities Break Down, Start of Another Great Depression?

When we take a look at history and go back to the Great Depression, we find that agriculture is a leading indicator for the economy. During the recession in 1930 we saw that agriculture prices declined very rapidly (for example cotton prices dropping 18% in just one week). A few years after that, the Great Depression initiated at full force with bank deposits being frozen. This started the Great Depression of 1932.

Today, the same is happening with agricultural commodities. Cotton dropped 10% in 1 week and is now down 20% in two weeks time. All other agricultural commodities have been very weak since the start of 2012 with the exception of soybeans.  The CRB index has also hit a new 2 year low.

Weakness in agriculture today is the evidence that the Great Depression is now being repeated. The only commodities that went up during the Great Depression were gold and silver, along with the gold/silver mining shares.

I will analyze 8 key agricultural commodities here: Agricultural Commodities Breaking Down, Start of Another Great Depression?