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The BMO Financial Group Commodity Price Index fell 3.5 per cent in September from the previous month, to a level of 158.4 (1993=100).  This represented only the second monthly decline during the past year, a run that has seen a total increase of 21 per cent. 

The September fall in the index is mainly a result of a reduction in natural gas prices and the biggest monthly drop for the Forest Products Index in nearly three years.  The declines in these segments were partially offset by a strong increase in agricultural prices and a modest rise in metal and mineral prices.

“Commodity markets have benefited from a powerful rally since mid-2002, which has been sustained by strengthening economic prospects in North America and abroad, booming residential construction, and generally declining inventories,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group. From its low point in July 2002, the bank’s commodity price index has risen more than 58 per cent.

“Canada’s economy, which is relatively strong in natural resources, has benefited from the sharp rise in commodity prices,” stated Mr. Sweet.  “During that period, employment in Forestry, Mining, and Oil & Gas increased by more than 11 per cent.  And rising commodity prices helped raise Canada’s trade surplus and reduce the nation’s net international indebtedness.

“Going forward, most commodity markets are expected to cool down from their recent boiling point, although there remains substantial upside risks to energy prices,” he added.

The Oil & Gas Index fell by 5.4 per cent in September, reversing increases during the previous two months.  Despite falling natural gas production in North America, reduced demand by power generation allowed for a relatively rapid build in underground storage over the summer and early autumn. Natural gas inventories should reach record-high levels by the beginning of the heating season. 

“Although the average level of the energy sub-index fell in September, crude oil and natural gas prices rose sharply during the second half of the month and into early October,” remarked Mr. Sweet.  “Both oil and natural gas markets felt the wrath of Hurricane Ivan, which substantially damaged productive facilities and infrastructure in the Gulf of Mexico.”

Oil prices have been especially elevated. The market is pricing in concerns about the diminishing safety cushion in OPEC reserves, at a time when those reserves are needed more than ever, given threats to oil supply from hurricanes, labour and rebel strife in Nigeria, ever-present risks in Iraq, and the ongoing Yukos situation in Russia.  However, market adjustments on the supply and demand sides and a gradual diminution of some of these risks should allow the price of West Texas Intermediate crude to fall below the US$40/barrel mark by mid-2005.

After reaching an 8.5-year high in August, the Forest Products Index posted its biggest monthly drop in almost three years, as prices for several wood products came down heavily from lofty levels.  The paper segment provided some offset, with prices increasing for many writing paper grades – including newsprint.  However, market pulp prices declined in the face of rising inventories. 

“Looking ahead, an anticipated slowdown in housing construction is expected to send the Forest Products Index onto a downward trend over the coming year,” noted Mr. Sweet.

The Metals & Minerals Index advanced moderately from already high levels as markets focused on the strength of U.S and Chinese demand for base metals and a weak U.S dollar lifted gold.  The gains during the month left metal and mineral prices close to 23 per cent higher than a year ago.  Healthy global economic conditions and generally tight supplies should help keep prices well supported over the next several months.  Volatility, however, is likely to remain a feature of the market.  

The Agricultural Index rebounded in September after five straight months of decline, with gains driven largely by sharply higher prices for wheat.  The monthly increase left the Agricultural Index almost 12 per cent higher than a year ago. 

“Agricultural prices are likely to remain firm over the next several months, primarily on the strength of wheat,” stated Mr. Sweet.  However, expectations of large U.S. crops for corn and soybeans have had a moderating effect.  While prices may remain firm through the remainder of this year, a healthier production outlook presages falling prices in 2005.

BMO Commodity Index for September 2004

The full BMO Financial Group Commodity Price Index report for September 2004 is available at www.bmo.com/economic.

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