Commodity prices slide to lowest level in a generation

A worker welds the copper product manufactured by Jiangxi Copper Corporation in Dexing, Jiangxi province, in March, 2014. [Photo/China Daily]

Lower fuel prices are compounding the longest commodity slump in a generation.

Because energy accounts for as much as half the cost to produce food and metals, all sorts of commodities will keep dropping, according to Societe Generale SA and Citigroup Inc. With inventories ample and slowing economies eroding demand, cheaper oil lowers the price floor for mining companies and farmers to remain profitable.

Corn may drop another 3 percent, cotton 6.5 percent and gold as much as 5 percent, SocGen estimates.

Costs are falling as surpluses emerge in copper and sugar and as the economy slows in China, the top consumer of energy, metals, pork and soybeans.

The Bloomberg Commodity Index of 22 items is heading for a fourth straight annual drop, the longest slump since its inception in 1991.

Brent crude, gasoline and heating oil are the biggest losers as an increase in drilling in the United States has led to a price war with producers in OPEC.

"There's been a structural change in oil, and there's more to come," said Michael Haigh, the head of commodities research at SocGen.

"This will also ripple through other commodity markets, in some cases directly, and others indirectly."

Brent crude, the international benchmark, has tumbled 42 percent since the end of June to $65.51 a barrel as US output jumped to a three-decade high. The price on Tuesday touched $65.33, the lowest since September 2009.

The Bloomberg Commodity Index fell 12 percent this year. The MSCI All-Country World Index of equities gained 3.1 percent, while the Bloomberg Dollar Spot Index climbed 9.8 percent.