Commodity Run Slows to a Jog

The long-running commodity rally continued for a third straight year in 2004, albeit at a markedly slower pace.

Crude oil's autumn run to record prices of more than $55 a barrel dominated the year's headlines and pulled other energy products higher. Gold also was strong, helped to 16-year highs by a flagging U.S. dollar. Chinese demand for natural resources helped to support broad commodity indicators.

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Grain prices were weak amid a bumper U.S. harvest. Cocoa prices dipped amid strong supply, which wasn't disrupted -- as some analysts expected at the beginning of the year -- by political upheaval in the Ivory Coast. Cotton prices plummeted, as genetic modification of seeds caused crop yields to skyrocket.

The Dow Jones-AIG Index of 20 commodities finished the year at 145.60, up nearly 11%, or 10.93 points, compared with gains of more than 20% in each of the previous two years.

Although the rally is slowing, many analysts aren't quite ready to predict an outright reversal for 2005. Many see no end in sight to the dollar's woes, to China's continued emergence as an economic power or to the strong demand for energy and the geopolitical risk that helped spur crude-oil prices higher.

Change in the futures industry itself continued in 2004, beginning with the February launch of a U.S. online platform run by the German-Swiss exchange Eurex. The new market offers contracts on U.S. Treasury securities that compete with those listed by the Chicago Board of Trade, which has maintained its dominant market share.

As 2005 begins, CBOT members appear likely to approve a plan to restructure as a for-profit company and may make an initial offering of the exchange's stock to the public.

See how major commodities fared in 2004. Plus, see a chart of percentage changes in commodities since 2003.

Volume at most big U.S. exchanges set records, with more than 1.5 billion contracts traded across the four biggest markets in New York and Chicago. Hedge funds and other Wall Street institutions flocked to contracts pegged to commodities, financial indexes and other assets as an alternative to the stock market.

Here is a rundown of the major commodity markets in 2004:

ENERGY

Although the record prices of the autumn garnered the most attention, oil prices were persistently high through much of 2004, boosted by a tight supply-demand balance, terrorism worries and an increase in speculative activity by hedge funds and other big players buying energy as a financial bet.

After setting records, the prices of crude-oil futures contracts on the New York Mercantile Exchange eased more than $10 in the last two months of trading, but still rose almost 34% for the year to $43.45 a barrel.

The year's highest close was in late October at $55.17 a barrel, and the average daily price was a record $41.47 -- an ominous sign for those worried that steadily high crude prices are acting as a drag on the global economy.

Going into 2005, many analysts expect prices that are below the records, but still historically high. "Oil is very much a demand-driven story right now," says analyst Jan Stuart, of the commodities brokerage house Fimat USA. "Inventories just aren't there right now" to give the market leeway to react to increasing need for oil to feed expanding economies in China, the U.S. and elsewhere, he says.

Mr. Stuart says he expects prices to stay at more than $40 a barrel through most of 2005, including a rally in the second half and a higher average daily price than last year.

The most recent U.S. government data showed a decline in commercial inventories of crude and other products. The federal Energy Information Administration reported that crude-oil stocks fell 800,000 barrels last week to 295.1 million barrels, off 0.3% for the week by still more than 8% above the year-earlier level.

At the same time, commercial stocks of distilled fuels, like heating oil, fell by 800,000 barrels to 119.1 million barrels, down 0.7% and 12.7% from a year ago, according to EIA.

Following crude oil's lead, other energy products moved higher last year. Heating oil and natural gas were helped late in the year by cold weather in the northeastern U.S.

At the New York Mercantile Exchange, gasoline futures rose nearly 17%, or 15.58 cents, to $1.0887 a gallon. Heating-oil futures jumped nearly 35%, or 31.71 cents, to $1.2297 a gallon. Natural-gas contracts were little changed, off 0.6%, or four cents, at $6.149 a million British thermal units.

METALS

The weakness of the U.S. dollar sent gold prices soaring, since the yellow metal often is viewed as an alternative means of exchange when currency and other "paper assets" fall into disfavor. The stock market's slump through most of the year also helped gold and other precious metals.

Gold futures ended off their highs of more than $450 a troy ounce, but rose 5.4% for the year, or $22.30, to $438.40 a troy ounce on the Nymex's Comex division.

Since the Sept. 11, 2001, terrorist attacks, when gold reasserted its role as an investor haven during times of crisis, the metal has soared more than 63%.

Many analysts acknowledge that gold, like any other asset that has rallied strongly, could experience a pullback, especially in 2005's early going. Still, few see a decline to less than $400 anytime soon.

With big U.S. budget deficits and the White House seemingly in favor of keeping exported American goods inexpensive overseas, the dollar looks likely to remain weak, which should leave high gold prices in place for the coming year.

For 2005, Carl Birkelbach , chairman and chief executive of the money-management firm Birkelbach Management Corp., says he also is worried about quickening inflation -- another common side effect of a weak dollar, which gives producers increased power to set higher prices for their goods.

"All you have to do is go to a restaurant and look at the prices on the menu," says Mr. Birkelbach , who believes gold could hit $500 this year. "Inflation is already creeping in."

Most metals followed gold higher in New York trading last year. Silver futures jumped 87.2 cents, or nearly 15%, to $6.837 a troy ounce. Platinum contracts climbed $54.40, or 6.8%, to $859.70 a troy ounce.

Although technically considered precious metals, these have industrial uses as well -- which could be a drawback in the upcoming year, says George Gero, senior vice president at Legg Mason Wood Walker Inc.

Silver, for instance, is a vital component of photographic film and paper -- a market that seems to be in decline because of increased use of digital photography.

Likewise, platinum in recent years has benefited as a substitute for palladium, which is a big component of the pollution-reducing car parts known as catalytic converters. The two metals, which are scarce, often moved in opposite directions during the past few years as car makers turned to whichever was less expensive at the moment.

With the cycle the past two years favoring platinum, many analysts believe a reversal might be in order soon, with a rebound for palladium, whose futures fell 6.2%, or $12.25 to $185.25 a troy ounce on the Comex last year.

Copper futures rose nearly 39% to $1.4525 a pound at Comex, helped by the weak dollar and surging demand in China.

AGRICULTURE

Livestock markets entered last year with a cloud still lingering from the discovery in late 2003 of a cow with "mad cow disease," the first such case in the U.S. However, as nervousness subsided, foreign markets that initially banned U.S. beef following the discovery reopened, and strong demand emerged both abroad and domestically for a variety of meats.

At the Chicago Mercantile Exchange, cattle futures were up more than 19% at year end at 87.825 cents a pound. Hog futures jumped 43% to 76.4 cents. Pork bellies -- the part of the slaughtered hog from which bacon is made -- rose 9% to 94.25 cents a pound.

By contrast, prices at U.S. grain markets were lower because of favorable growing weather and, in the case of corn, competition from China. Unlike other commodities that China must buy to satisfy the needs of its economy, that country grows enough corn to be a net exporter of the crop.

At the Chicago Board of Trade, corn futures fell nearly 17% to $2.0475 a bushel. Wheat fell more than 18% to $3.075 a bushel. Soybeans sank about 31% to $5.4725 a bushel.

Prices may rise in the near term, though, says grain broker Victor Lespinasse of A.G. Edwards & Sons Inc. Aside from the possibility that last year's crop-friendly weather might not reoccur, he says growers have spotted a degenerative plant disease known as "rust" that may affect the U.S. harvest this spring and summer.

TROPICAL COMMODITIES

The tropical crops known to traders as "softs" benefited from what most people might consider bad news last year.

The most notorious example was orange juice, which racked up most of its big gains for the year in the late summer and early fall, when an unprecedented succession of hurricanes struck Florida. Frozen-juice futures soared more than 37% to 87.95 cents a pound on the New York Board of Trade, or Nybot.

With less fanfare, coffee registered an even bigger rise, up nearly 60% to $1.0375 a pound at the Nybot. The increase may continue because of tight supplies, especially stemming from an expected decline in the size of this year's Brazilian coffee crop, says independent analyst Judith Ganes-Chase.

"The handwriting has been on the wall for some time now in this market," Ms. Ganes-Chase says. "All the scenarios for supply tightness that could materialize have done just that."

Analysts also expect the size of Vietnam's coffee harvest to be down 30% after a drought and floods.

Conversely, Ms. Ganes-Chase says, the two laggards in the tropical-softs complex -- cotton and cocoa -- were done in by supply gluts last year. At the Nybot, cotton futures plunged more than 40% to 44.77 cents a pound, as crop yields increased sharply. Cocoa fell 2.1% to $1,547 a ton.

Write to Peter A. McKay at peter.mckay@wsj.com