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The very long term view on commodity prices

A Long-Run Version of the Bank of Canada Commodity Price Index is as hot a title as it sounds

Keith Halliday | Yukonomist

If you are looking for Christmas gift ideas for that special policy analyst in your life, I highly recommend A Long-Run Version of the Bank of Canada Commodity Price Index (1870 to 2015).

In the age of Twitter, when even the 30-minute cable news cycle is too much for many, it’s good to take a step back and take the 100-year view.

And to allow us to do that about commodity prices, boffins at Statistics Canada have been beavering away to link dozens of dusty old data sets on historic commodity prices.

This is a family newspaper, so I won’t get into the details of their Fisher chain index methodology. But the insights that come out the other end shed a unique light on the Yukon’s favourite commodities, as well as the jobs and business opportunities they create.

The report includes dozens of commodities: nine metals, three energy sources, lumber, pulp, newsprint, six agricultural commodities, plus fish.

The first insight is how Canada’s commodity production has changed over the years. Back in 1870, when Canada acquired what is now the Yukon, 88 per cent of the young nation’s commodity output was agriculture. That has declined steadily to just 12 percent in 2014.

In 1870, forestry was 11 per cent. It peaked in 1947 at 36 per cent but in 2014 was just eight per cent.

Energy was one per cent in 1870 and has surged in recent decades to 63 per cent in 2014. Canada is indeed a petro-commodity player.

As for mining, it peaked at 31 per cent of our output during the Second World War and has been declining through some booms and busts to 15 per cent today.

If you look at mining as share of the total economy and not just commodities, so far in 2017 the industry represents 1.2 per cent of Canada’s total output. That is just “metal ore mining,” and excludes coal, quarries and support activities for the mines.

While mining is critical to Yukoners, you can see why people in, say, Toronto think of it as a small and declining part of Canada’s economic story.

The next insight is from the mix of Canada’s mining output and the different fates faced by the Yukon’s most common commodities. Gold was a huge part of Canada’s output until World War 2. You won’t be surprised to hear that there is a huge spike between 1898 and 1900, when Klondike gold pushed the metal to over 3/4 of Canada’s total mineral output. Today it is around 1/3.

Copper and nickel were each around 20 per cent of Canada’s output for decades after the Second World War, but have slipped to about 10 per cent each today.

Silver, lead and zinc now represent less than four per cent of mineral output combined. The Faro mine may have contributed to a surge in zinc that can be seen on the chart from the 1970s to the late 1990s, but the line trends down after that.

So much for production. What about prices? For commodities overall, the long-term price trend has been negative. The index was 155 in 1870 and was 79 in 2015. This data is interesting because of the long-standing debate about population growth, resource scarcity and technological change.

Some people thought that rising populations and fixed amounts of farmland and non-renewable resources would lead to shortages and price spikes. Others argued that technological advances and improved business techniques would allow more output to be generated at ever lower costs.

The long-term price data in the report suggest the latter argument has prevailed (although we can’t say for certain whether this will be the case in the future). Take agriculture commodities as an example. The U.S. Department of Agriculture puts out inflation-adjusted data on prices for corn, wheat and soybeans. All three are only half or even one-third as expensive as they were in the 1950s.

The report also contains interesting hints about the “supercycle,” that semi-mythical beast that often inspires the most optimistic mineral exploration plans. The supercycle idea is that powerful, but sometimes deeply hidden, factors drive the commodity industry in multi-decade cycles of boom and bust.

Indeed, the report’s authors include a chart showing their index from 1870 today. Over and above the daily ups and downs of the commodity markets, it clearly shows some big cycles every 30 years or so. There are big surges during both world wars, which is to be expected given the massive war efforts. There is another after the world changed monetary systems in the 1970s after the demise of the Bretton Woods system, and another in the first part of this century, possibly caused by the massive growth in China and India.

Falling oil prices since 2014 have hit the index hard given how big a part of Canada’s output comes from this sector. The index today is below the line. Does this portend another slump for a decade or two until another supercycle upturn in the 2040s?

Whoever manages to answer that question correctly may make big bucks in mining and commodity investing.

So what does all this mean for the Yukon? One observation is that, even at the nadir of the cycle over the last 100 years, mining never went to zero. If a property has good grades, good economics and a strong management team, it can survive even the worst cycle.

On the other hand, the long term production and pricing trends may not be our friends. We can improve the chances of Yukon mines if we keep working to keep energy costs and taxes low, as well as regulatory processes predictable and not too onerous.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.