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The BMO Financial Group Commodity Price Index took a breather in April from its extended run of monthly increases, falling 1.3 per cent to 181.1 (1993=100).

“This is only the second drop in the index we have seen in the past seven months,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “That said, strong market conditions remain in effect, with the index only barely off its all time high reached in March.”

While the strong uptrend in commodity prices of the past two years is not expected to be sustained in 2005, the all-items index is likely to hold near its average level of 2004.  “Performance amongst commodities is likely to be mixed, with sustained strength in metals and some gains for pulp and paper offsetting declines in wood products, crude oil, and agricultural products,” stated Sweet.  “By 2006, moderating global economic growth and rising production of several commodities should relieve tightness in most commodity markets and lead to generally lower prices.”

The Oil & Gas Index remained essentially unchanged in April from its March level, although it still stood roughly 36 per cent higher than a year earlier.  The leveling out of the price index for oil and gas masked divergent, offsetting movements in the two commodities, with oil prices declining and natural gas prices rising at a similar rate.  Sweet also noted that towards the end of the month and during the first half of May, the prices of crude oil and natural gas declined, weighed down by high inventory levels for this time of year.

The Metals & Minerals Index fell 2.3 per cent in April, amid concerns about the pace of global economic growth and a firmer tone to the U.S. dollar.  Slower growth generally foreshadows weaker demand for industrial metals while a stronger U.S. currency makes gold less attractive as an alternative to U.S. assets.  The firmer U.S. dollar also hurt base metals by making them more expensive in terms of foreign currencies. “This index is likely to temper further in the coming months, but healthy global economic expansion, along with low inventory levels, should keep prices well supported through the remainder of 2005,” said Sweet.

The Forest Product Index is losing strength, as signs of weakening conditions have emerged for many products.  Most evident were sizable price declines for wood products.  Rising supplies, at a time when demand-side expectations tilted further towards a softer outlook, caused some market slack to appear for lumber and structural panels.  On the pulp and paper side, conditions were mixed, with paper prices generally gaining, while those of pulp and linerboard stayed flat.

“The Forest Product Index is expected to trend lower through the remainder of 2005 and 2006, mainly due to a cyclical erosion of market conditions for wood products,” remarked Sweet.  “Comparatively more robust prospects for pulp and paper should attenuate the decline.”

The Agricultural Index fell 1.7 per cent in April, amid broad-based weakness in grains and oilseeds.  There was little change in the fundamental supply and demand picture, which is characterized by ample current and prospective supplies and moderate demand growth.

“Agricultural prices, which are currently roughly 7 per cent below their levels from a year ago, are expected to continue moving lower as large crops in key producing areas cloud global markets,” noted Sweet.

BMO Commodity Index for April 2005

The full BMO Financial Group Commodity Price Index report for April 2005 is available at www.bmo.com/economic.

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