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After two months of increases, BMO Financial Group's Commodity Price Index fell 3.9 per cent in July to a level of 128.4 (1993 = 100).

"The biggest influences came from a sharp drop in natural gas prices and more moderate declines in various agricultural products, where ongoing harvests had typical dampening effects," said Earl Sweet, Assistant Chief Economist, BMO Financial Group.

"Over the past year, the all-commodities index has rallied from the depressed levels of the first half of 2002 and hit a two-year high in February," said Sweet.  "Since then, corrections in energy, from unusually high levels, and agricultural prices have reversed part of that rally."

BMO Financial Group's Commodity Price Index encompasses the price movements of 19 commodities key to Canadian exports, grouped in four broad categories.  In July, the Metals & Minerals component was the only sub-index to advance.  The Oil & Gas sub-index, followed by the Agricultural group, registered the biggest decline.  The Forest Products sub-index remained little changed.

July's sharp drop in the Oil & Gas Index – down 8.8 per cent – reversed gains of the previous two months and brought the index back to its level in April.  "Even with this decline, however, the energy sub-index still stood 74 per cent higher than a year earlier," noted Sweet.

The entire decline in the Oil & Gas Index occurred on the natural gas side.  "Natural gas prices, while still very high by historical standards, have been retreating from their peak in February, as fuel switching and generally reduced consumption have allowed inventories to rebuild," observed Sweet.

Looking forward, with crude oil and product prices remaining high and natural gas prices falling, the demand for gas will likely stabilize and begin to rise as utilities switch back again to natural gas.  A strengthening in the US economy during the second half of this year should raise industrial demand.  "Thus, natural gas prices are likely approaching their low for the year," said Sweet.

Crude oil prices remained flat on average in July, as concerns about OPEC's quota decision and generally tight inventories for crude oil and products in North America kept a firm bid in the market.  "The market is looking ahead to a rising demand for oil products during the second half as the pace of US economic growth strengthens," said Sweet. Although OPEC is producing about 1 mmb/d above quota, North American inventories will likely remain tight through to the end of the year, even with rising production and exports from Iraq and the Former Soviet Union.

Stronger-than-anticipated second-quarter US GDP, falling commodity exchange inventories, and labour relations problems contributed to push the Metals & Minerals Index higher in July.  The Index rose by almost 1 per cent to a level roughly 9 per cent higher than a year ago.  All but two commodities tracked by the Index posted a gain in the month.  "Of the two that bucked the trend, gold eased from lofty levels and nickel essentially remained unchanged," said Sweet.  Over the past year, nickel has outperformed other base metals by a substantial margin.  While nickel’s recent price gains partly reflect a strike at Inco, the metal's market fundamentals remain among the most constructive in this group.  While near-term upside in the Minerals & Metals Index is limited, prices should strengthen further towards the end of the year and in 2004 amid accelerating economic growth.

The recent rally in the Forest Products Index took a pause in July, as the Index fell marginally by 0.3 per cent.  "This followed a strong gain in June – the biggest in more than two years," noted Sweet.  In July, the effect of a drop in pulp prices was almost completely offset by a surge in oriented strandboard prices.  Prices of all other key commodities in this group either were unchanged or varied little.  "Since the beginning of 2003, forest products prices have steadily risen from historically depressed levels, driven higher primarily by output restraints," he said. Going forward, the key to maintaining the current price momentum in the sector will be the extent to which output can continue to be restrained in the face of persisting excess capacity, added Sweet.

Finally, the Agricultural Index fell deeper in July, largely reflecting usual pressure from the current wheat harvest and expectations of larger US soybeans and corn crops.  The Index was down 2.7 per cent to a level roughly 1 per cent below where it stood a year ago.  "This was the eighth decline in the past eleven months. However, this followed a sharp run up last year," said Sweet.

While average wheat prices fell in July, Sweet said they have firmed over the last three weeks of the month, as an already tight global supply-demand balance is being further aggravated by expectations of reduced production in the European Union due to very hot, dry conditions.  Additionally, weather concerns are also leading to lower output projections in other key producing and exporting countries (e.g., Australia, Canada and China).  "In this environment, prices are expected to remain at comparatively high levels over the next year despite the recent downward trend," said Sweet.

BMO Commodity Index for July 2003

The full BMO Financial Group July 2003 Commodity Price Index report is available on the BMO website at http://www.bmo.com/economic.

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