Recession has become a buzzword, everybody is losing confidence but it is well said that crisis generates opportunity and one should know how to turn crisis into opportunity. Commodity is the field which generated opportunity in every phase of business cycles. In general, commodity tanks after the crash of market or recession occurs. If we look back, occasionally it is evident that it makes new peak in the prices after recession.

Two dimensions could be attributed to these higher prices after during recession. First, production cut due to lack of demand and liquidity and secondly, various monetary steps to revive the economy, viz; interest rate cut, relief packages, tax cut etc. If we can take help of historical data, what happened in 1929 crash and its aftermath is telling the similar story. For example, in 1929 corn prices dragged down by 80% approximately from its peak due to crash in market. However, in 1937 it made a new high and it was higher than the 1929 peak. We can see the similar trend during 2009 – 2010, as supply is shrinking in almost all commodities on the other hand, government of major economies are taking historical decision to revive the economy.

With the gambling of Fed with US dollar, we can say that commodity still have legs as we know that commodity performs better amid weak dollar. Due to its essential nature of commodities for human lives, investors shift their funds into commodities during war and financial crisis. The historical risk premium, during the 1959-2004 period, on commodity futures has been positive at about 5 percent, is supporting the fact that commodities get continuous and somewhat definite returns in time of crisis as well. Commodity prices rise even during recession, currently many commodities moving up on the hope of improvement in demand.

Now a day, all metals, energy and agro products are in headlines due to their eye catching upside movements in the prices. Most of the people talking about more than 60% fall in crude oil prices, which is now on the path of recovery. Fall in oil prices are not the ideal sign of recession, as in last nine years, three times oil prices have declined by more than 50% and each time it was not the end of the bull market. From 1959 to 2004, during the tough time commodities offered better return to the investors and proved less risky as compare to stocks.

We know that this not an ordinary recession, and people are taking it as “a once-in-a-century credit tsunami” after great depression. Since 1954, the average recession in the U.S. has lasted 17 months. Entire world is coming forward altogether and doing everything, which is in their hand to create liquidity and we know that liquidity is bullish for commodity. However, any concrete changes will take several months to occur of this stimulus packages.

Commodities are cyclical in nature and thus rise and fall on business cycle. According to an analysis, based on multi year data, different commodities behave in different ways in different business cycle phases. If we just divide the business cycle of commodities into three parts; as mentioned below:

Business Cycle Phases

Late Expansion: During this phase, expectations of profit are at their high point, stock prices are sky high. Banks approve loans easily. During this period, generally energy and metals outperform other commodities.

Early Recession: During this phase uncertainties arises in the market and market for physical investment get saturated and people get less profit. Eve though, commodities earn positive return, while stocks and bonds get negative returns. In early recession, few commodities viz., sugar, coffee, soyabean etc perform well due to their higher demand. In this recession also, we have seen that sugar gave good return despite the mayhem in the market. Even, crude oil and base metals gives positive return, which was evident in 2008.

Late Recession: Recession continues and cycle enters in to late recession phase. Market moves on hope that economy will revive and some immediate monetary measure like, interest rate cuts, tax cuts etc, provide liquidity in the market. Profits are moderate but on increasing pace in this phase. During late recessionary business cycle some commodities viz., maize, soyabean, sugar and gold outperform other commodities and other investment avenues, which we have already seen in 2009. Gold has already become the hot favourite investment avenue for the investors and the entire world is diversifying money into gold. We are already into late recession phase in which various majors takes place to stimulate the economy but nothing much occurs on actual basis.

Early Expansion: In early expansion, stocks and bond outperform commodities. Stock gives better return than bond. Recovery in equity market by and by offer supports to commodity market. Market witnesses spontaneous movements, optimism, and higher-than-expected profits during the Early Expansion. Some impact of various government as well as other measures can be witnessed. Market feels the pinch of supply tightness in the course of improving demand. Ongoing production cuts in metals and energy sectors are likely to bring the prices at comfortable levels. There is concern in the market that these cuts will turn into supply squeeze when demand will reoccurs after taking these financial measures. For example, China alone has closed about 27 percent of its capacity of aluminum, and market has yet to see the impact of that. In the same way, OPEC has cut crude production by mbpd, which will give positive impact on the prices in time of recovery.

In general, commodities perform better during late recession and late expansion with decline in interest rate and fresh inflow of money. Base metals get more return in early recession as compared to late recession while agro futures display pattern quite strongly even, in recession time. However, it is not compulsory that business cycle will be predicted with crystal-clear accuracy, but they provide historical prospective, which can use to evaluate commodity market.

At present, cooling inflation has given a sigh of relief to the market but due to monetary measures taken by various economies has changed the outlook of inflation and it is expected that it will reoccur soon as market will flood with new printed money to provide liquidity into the economies. Moreover, commodity assets under management have also expanded their business in this quarter, which slid last year.

Some positive news has begun to emerge in various economies, giving a ray of hope that they are approaching the end of this rout. China PMI numbers, rise in CRB Index, Baltic Dry Index, rising energy and base metals demand in China and other countries, positive home sales and consumer confidence data have giving the same indication.

There is an expectation that commodity fund’s assets may double in 2009. There is an expectation in the market that worst is probably over, however, trading is expected to remain volatile for few months as negative news are still coming. Geneva-based WTO has predicted that World trade is likely to shrink by nine per cent this year, the biggest contraction since the World War II, will cap the upside of the commodities prices.

Commodities have been going through a bottoming process and with the supply cutbacks, when demand returns in a big way - probably fourth quarter of 2009 or in beginning of 2010, we may see a return to strong gains in commodity prices. There is a light at the end of the tunnel. We hope that this tunnel should not much longer than people are anticipating.