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While its effect on commodity markets was only partially reflected in August, Hurricane Katrina played a part in sending the BMO Financial Group Commodity Price Index to a new record last month.  The Index surged 7.5 per cent over the previous month to 195.8 (1993=100).

“Even prior to Katrina, August was shaping up to be a record-breaking month for the Index,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “The hurricane’s impact increased upward momentum of a number of key commodities like oil and gas and halted declines in other commodities such as wood products.  The upward effect on prices intensified in early September, as the extent of the damage became clear.”

Katrina is expected to leave her mark on commodity markets for several months, although much of the surge in energy prices had been reversed by mid September.  Above all, the extensive rebuilding work in the affected areas has lifted the prospects of wood products.

The Oil & Gas Index saw the sharpest increase among the sub-indexes in August, rising 15.2 per cent to a level almost 50 per cent higher than that of a year earlier.  “Both crude oil and natural gas recorded very large increases, at first driven by concerns that tropical storms would disrupt production in the Gulf of Mexico at a time when markets were already tight, and at the end of the month by Hurricane Katrina, which severely damaged oil and gas production, refining, and transportation infrastructure in the Gulf,” stated Sweet.  “Although shut-in production is gradually diminishing, it will take several months to repair and rebuild facilities damaged or destroyed by Katrina.”

The Metals & Minerals Index rose 3.7 per cent in the month, lifted by gains in precious metals and base metals.  Gold, which is weighted heavily in the sub-index, advanced 3.2 per cent as a weaker US dollar boosted its safe-haven value.  Meanwhile, the base metals were supported by continued demand strength, supply concerns, and low inventories.  Prices are generally expected to decline over the course of the next year but low inventories should continue to support them at fairly high levels. 

“Base metals prices showed little initial reaction to Hurricane Katrina,” according to Sweet.  “However, the after-effects of the hurricane should generally be constructive over the next several months.” 
 

The Forest Products Index fell for the sixth straight month in August, as plentiful supplies continued to sustain the markets’ negative tone.  “Hurricane Katrina caused some panic in wood product markets at the end of the month, with buyers scrambling to secure supplies in the US Gulf region,” said Sweet.  “Lumber and structural panel prices surged in the last few days of August and in early September, and the extent of the devastation in the affected areas has prompted us to revise higher our price forecast for products like lumber as massive reconstruction work will boost demand for wood products over the next several months.”

The Agricultural Index gained 0.8 per cent in August.  The increase was due solely to higher prices for wheat, which benefited from solid export demand.  The other commodities in the index – corn, canola and soybeans – all retreated as improved weather boosted U.S. yield prospects.  The gain during the month took average prices about 11 per cent higher than a year ago. 

“In light of the substantial increase in ending stocks for the just completed crop year, prices are expected to move lower over the next year,” stated Sweet.  “Hurricane Katrina had no visible impact on agricultural products tracked by the Index.”

BMO Commodity Index for August 2005

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