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The BMO Financial Group Commodity Price Index dropped for the second consecutive month in May, falling 6 per cent to 170.6 (1993=100).  All commodity groups except agricultural products experienced declines from the previous month.

“The overall index has fallen 7 per cent since reaching an all-time high in March – though this retraced only part of the rapid increases in earlier months,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “Despite this, however, market conditions remained at or close to the boiling point for many commodities.”

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 saw a sharp, albeit temporary, retreat in May from its record high the previous month.  The prices of both crude oil and natural gas fell on evidence that inventories were accumulating to levels well above five-year averages.  Soft prices in May also reflected the market’s expectation that the pace of global economic growth was slowing. 

“But more recently, during the first half of June, oil and natural gas prices more than retraced their losses in May,” noted Sweet.  “The pace of inventory accumulation has moderated and there are concerns about limited refining capacity, the supply adequacy of diesel, jet fuel and home heating oils, and the onset of the hurricane season which could disrupt production of oil and gas in the Gulf of Mexico.”

The Metals & Minerals index slipped further in May, down 3 per cent amid concerns about the pace of global economic growth and a firmer tone to the U.S. dollar at that time.  Slower growth generally points to 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. 

“Notwithstanding the decline, metals and mineral prices remain at elevated levels, with the index 17.4 per cent higher than a year ago,” said Sweet.  “Although prices are expected to ease further in the months ahead, low global inventories, along with a respectable pace of global economic expansion, should keep prices at relatively high levels through the remainder of 2005.”

The Forest Products Index lost more ground in May, falling 3.8 per cent for the month as rising supplies maintained downward pressure on prices for many products.  “The index is expected to trend moderately lower through the remainder of 2005 and in 2006, mainly due to a cyclical erosion of market conditions for wood products,” stated Sweet.  He noted that comparatively more robust prospects for pulp and paper should attenuate the decline.

With concerns about the weather in key producing countries, the agriculture index rose 1.5 per cent in May.  “Hot and dry weather in the southern United States and a draught in parts of Australia are important contributing factors to this rise,” said Sweet. 

With production outstripping consumption in the current crop year, stocks have increased relative to consumption and have weighed on prices since last November.  Sweet says that prices are likely to be pressured lower over the next year amid large crops in key producing areas and tough export competition.

BMO Commodity Index for May 2005

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

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