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- CRB Fundamentals - 2008 Commodity Articles

Commodity Price Trend

The Reuters/CRB Continuous Commodity Index (CCI) in 2007 extended the rally that began in 2001 and posted a new record high of 477.48 in December 2007. During the 2001-07 bull market, the Reuters/CRB CCI index rallied by a total of 161% from the low of 182.83 in October 2001 to the record high of 477.48 in December 2007. The Reuters/CRB CCI index closed 2007 up +20.6%, marking the sixth consecutive annual increase (2002 +23.0%, 2003 +8.9%, 2004 11.2%, 2005 +22.5%, 2006 +13.5%).

Five of the six Reuters/CRB Futures Price Sub-indexes posted gains in 2007: Grains +53.0%, Energy +39.5%, Metals +26.4%, Industrials +13.4%, and Meats +1.0%. Only one of the sub-indexes showed a decline: Softs at -1.8%.

The Reuters/CRB CCI index was driven higher in 2007 by basically the same factors as 2006, i.e., strong physical demand in most commodity markets, a continued influx of cash into commodity index funds, and the weak dollar. The dollar index fell by -8.4% in 2007, adding to the -8.2% decline seen in 2006. Commodity prices in 2007 received continued support from strong world GDP growth until the credit crunch starting biting into U.S. GDP growth late in the year.

The Reuters/CRB Futures Price Energy Sub-index, which is comprised of Crude Oil, Heating Oil, and Natural Gas, accounts for 18% of the overall Reuters/CRB CCI Index. The Energy Sub-index in 2007 closed +39.5%, more than reversing the previous year's decline of -16.1%. The energy sub-index has now shown double digit percentage gains in five of the last six years (2007 +39.5%, 2006 -16.1%, 2005 +54.4%, 2004 +27.5%, 2003 +11.9%, 2002 +56.5%). Crude oil in 2007 on a nearest-futures basis closed sharply higher by +57.2% following the 2006 close of virtually unchanged. Gasoline prices rallied by 54.5% in 2007 and heating oil prices rallied by +65.5%. Natural gas rose +18.8% in 2007, regaining part of the -43.9% plunge seen in 2006. Petroleum prices showed strength all during 2007 due to a production cut by OPEC at the end of 2006 and the beginning of 2007, and then due to strong demand and a weak dollar through the remainder of the year.

The Reuters/CRB Futures Price Grains and Oilseeds Sub-index, which is comprised of Corn, Soybeans, and Wheat, accounts for 18% of the overall Index. The Grains and Oilseeds Sub-index in 2007 closed +53.0% yr/yr, adding to the gain of +44.0% seen in 2006. Corn prices continued to rally in 2007 and closed +16.7% on the year due to strong demand from ethanol producers and strong demand for corn as human food and livestock feed. However, the star performers in 2007 were soybean prices (+75.4%) and wheat prices (+76.6%). Soybean prices rallied on reduced acreage and strong demand. Wheat prices rallied mainly due to strong demand combined with severe drought conditions in key wheat growing areas of the world, which produced the lowest U.S. ending stocks since 1947.

The Reuters/CRB Futures Price Industrials Sub-index, which is comprised of Copper and Cotton, accounts for 12% of the overall Index. The Industrials Sub-index showed a +13.4% gain in 2007, adding to the +21.9% gain in 2006. Copper closed +6.2% in 2007, posting the sixth consecutive yearly gain (2002 +6.7%, 2003 +49.6%, 2004 +42.6%, 2005 +45.4%, 2006 +32.0%, 2007 +6.2%). Copper prices saw strength in 2007 due to the weak dollar and continued strong demand in China, but were undercut by the weak U.S. housing and auto sectors, which are big copper users. Cotton prices rose +21.0% in 2007, despite poor demand, because of reduced cotton planting as farmers dedicated more land to corn, soybeans and wheat.

The Reuters/CRB Futures Price Livestock Sub-index, which is comprised of Live Cattle and Lean Hogs, accounts for 12% of the overall Index. The Livestock Sub-index closed slightly higher by +1.0% following the two previous year's of small losses (-1.9% in 2006, -1.1% in 2005). Live cattle futures prices closed +4.0% in 2007 and lean hog futures prices closed -6.2%. Livestock prices were undercut in 2007 mainly by high feed prices, which caused higher slaughter rates.

Precious Metals
The Reuters/CRB Futures Price Precious Metals Sub-index, which is comprised of Gold, Platinum, and Silver, accounts for 17% of the overall Index. The Precious Metals Sub-index in 2007 rallied by +26.4%, which was the sixth consecutive yearly gain (2002 +17.1%, 2003 +25.9%, 2004 +8.9%, 2005 +20.5%, 2006 +28.0%, 2007 +26.4%). Bullish factors included lagging mining output, strong investment and jewelry demand, and the weak dollar in 2007.

The Reuters/CRB Futures Price Softs Sub-index, which is comprised of Cocoa, Coffee, Orange Juice, and Sugar #11, accounts for 23% of the overall Index. The Softs Sub-index in 2007 closed -1.8%, breaking the string of three consecutive yearly gains (2004 +37.2%, 2005 +22.4%, 2006 +13.2%). Sugar in 2007 showed a decline of -7.9%, adding to the 2006 decline of -20.0%, as production remained relatively high. Coffee prices rose +7.9%, adding to the 2006 gain of +17.8%. Cocoa prices rallied +24.5% in 2007, adding to the 2006 gain of +8.7%. Orange juice fell sharply by -28.6% after the +60.7% rally in 2006 due to the lack of damaging hurricanes during the 2007 hurricane season, weak orange juice demand, and an increase in orange imports from Brazil.

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