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(October 28, 2008) If anyone was in denial that Canada’s economic fortunes were heading south, a new Scotiabank Commodity Price Index report proves that things north of the 49th aren’t so rosy.

The report reveals that the index, which measures price trends in 32 of Canada’s major exports, dropped for the second consecutive month. It was down 6.8% in September.

Although the index is still at 24.5%, as it was in September 2007 , it’s expected that commodity prices will fall even further in October due to America’s faltering economy.

“The decline in commodity prices has been heightened by a massive unwinding of futures and commodity-index investment positions by hedge funds, shifting out of commodity investments deemed too risky in a global deflationary economic environment,” says Patricia Mohr, vice-president, economics, and commodity market specialist at Scotiabank. “Investment in commodity-index-linked securities fell from about $200 billion at the end of June to no more than $150 billion in September and will plunge in October.”

The index’s decline was largely due to the oil and gas sub-index, which dropped 10.6% from August, and the agricultural sub-index, which fell 10.6% month over month. These two sectors are where hedge fund outflows from the futures market have been the most pronounced.

Oil prices have also fallen significantly in the past couple of months, from $116.68 a barrel in August to $63 on Monday. These prices are the lowest since March 2007.

“The reduction should largely bring world supplies back in line with demand, though the market remains skeptical that the cut will be enough in view of uncertain global economic conditions,” says Mohr. “The (OPEC) cartel stands ready to cut further at its December 17 meeting, fearing that the collapse in oil prices may jeopardize many existing projects and lead to the cancellation or delay of others, possibly resulting in a medium-term supply shortage, and we concur with this statement.”

The Metal and Mineral Index also lost ground, dropping 9.7% since its July 2008 peak. It’s expected to fall further in October.

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Export growth expected to decline until 2010

(October 28, 2008) On Thursday a new report by Export Development Canada revealed that export growth will continue to decline in 2009, with a recovery unlikely until at least mid-2010.

Peter Hall, chief economist at the EDC says, “A quick rebound to the global slowdown is clearly not on. The considerable excesses of the boom years, including lending, housing and commodities, will take considerable time to work off.

“The global financial story that is dominating headlines everywhere began with the U.S. housing market, which will remain underwater given the millions of excess units on the market. When that inventory is worked through, a recovery may have the chance to develop, but we don’t expect that to happen until 2010, at the earliest.”

According to the report, when large commodity price movements are discounted, the real volume of exports has dropped about 5% this year.

However, price gains were strong enough during 2008 that the dollar value of exports will increase by 1%. That’s good news for this year, but it’s highly unlikely that will happen again as lower commodity prices are expected next year.

The EDC also reports that Canada’s overall economic performance “will remain lackluster,” with growth rising by just 0.9% this year and 1.4% in 2009.

“Normally, growth this weak would further pummel Canadian exports, but good timing and key industry developments will keep overall activity close to 2008 levels,” says Hall.

(10/28/08)