To say that commodity stocks have weakened—and seem ready to continue weakening—against commodity futures is not the same thing as saying that futures are in a bull market. After all, the Thomson Reuters/Jefferies CRB Index has sagged 10.2 percent so far in 2010. If, however, some life is kicked into commodities, futures rather than stocks would likely be the immediate beneficiary.
Because of the equity market's current weakness, commodity producers and processors are lugging millstones ‘round their necks. Their stocks are, after all, stocks. Yes, producers can provide levered gains when commodity prices rise above their costs of production, but leverage is a two-edged sword. Producers' bottom lines—and shareholders' wallets—suffer when commodity prices head in the other direction.
What's weighing on prices, compared with last year's action, are the increasing odds of deflation (see "The Latest Odds On Inflation Vs. Deflation"). A lot of the investment enthusiasm for commodities has been wrung out. That might not be such a bad thing—at least for those who feel speculators have distorted market prices.
Ultimately, though, fundamentals will out. Agricultural commodities, in particular, are likely to continue to be an exquisite bellwether of global demand.
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