Commodity Prices in 2014: What's Behind the Plunge? Hint: It's Not Just Oil

Source: Flickr/katscool.

Stock market investors have enjoyed a huge bull market ever since the end of the financial crisis, and it appears that stocks will once again post a winning year when 2014 comes to a close in a few weeks. For the commodities markets, however, it's been a much different story, with commodity prices in 2014 on track to suffer their worst loss since 2008. As much attention as crude oil has gotten lately, it's far from the only commodity weighing on the overall market for physical goods. Let's take a closer look at exactly what's been driving the declines in commodity prices in 2014 and whether they're likely to continue falling next year.

^GNX data by YCharts.

Source: Flickr/Lindsey G.

Why are commodity prices plunging? As you can see in the graph above, commodity prices have been weak throughout the second half of the year, and the pace of the decline has accelerated dramatically in just the past month. When you look at the weightings of the S&P GSCI Commodity Index, it's not hard to figure out the impact that crashing oil prices have had on the overall benchmark. Domestic crude oil makes up more than 40% of the GSCI, with international Brent crude taking on another 15%. All told, energy products make up well over three-quarters of the entire weighting of the index.

Yet as important as energy is to the overall commodity market, it's not the only sector that struggled in 2014. After years of strength, agricultural commodities have also been under a lot of pressure this year, with the agriculture subcomponent of the GSCI down 10% so far in 2014, even after having rebounded by almost 10% since the beginning of October. Sugar and cotton prices have weighed the most on the agricultural sector with declines of 26% and 22%, respectively, but corn and wheat have also posted double-digit percentage drops.

Certain industrial metals have also suffered at the hands of weak economic conditions abroad. Copper is down 11% so far this year, with the slowdown in Chinese growth weighing heavily on the metal because of its sensitivity to economic activity. As countries around the world have cut back on their spending on construction and infrastructure projects, demand for the key base metal has fallen. The same is true for silver, whose industrial purposes have also suffered from weak economies and has helped push silver prices down about 12% year to date.

Source: Flickr user Tony Hisgett.

By themselves, these other commodities weren't enough to have much impact on the GSCI, given that corn, wheat, and copper each have about 3% weightings in the index and sugar, cotton, and silver all contribute less than 1% to the index's value. Nevertheless, much of the commodity sector had to retrench in 2014.

One of the key reasons commodities have struggled in 2014 is the strength of the U.S. dollar. Given the global demand for key commodities, it's important to look at the impact of foreign exchange rate fluctuations on the local prices for commodity products. In many nations, a rising dollar made commodities more expensive in local-currency terms, especially in hard-hit areas like Russia, where the plunging ruble more than offset the declines in U.S. dollar terms for many commodities. But as long as dollar strength continues -- which many economists believe is likely in 2015 -- then commodity prices will remain under pressure.

Source: Wikimedia Commons.

These commodity markets woke up in 2014That said, not every commodity market suffered this year. Coffee prices exploded higher, with the S&P GSCI Coffee Index posting a nearly 50% jump so far in 2014. A drought in key growing regions of Brazil sent prices spiking higher, and that has caused challenges for companies from coffeehouse giant Starbucks to grocery-coffee provider J.M. Smucker .

Beef prices also leaped higher, with gains of 20% to 40% in the markets for live and feeder cattle. Poor weather conditions in many areas in which ranching is common helped support beef prices, and gains were extreme enough that cattle-rustling activity soared as the payoff for stealing herds increased.

Nevertheless, from an overall perspective, the attractiveness of the financial markets and the strength of the U.S. dollar left commodity investors feeling left out of the bull-market environment. Unfortunately, until key international economies in Europe and the Asia-Pacific region start firing on all cylinders again, those negative factors will be likely to continue indefinitely. As a result, commodity prices could likely continue to languish well into 2015 and beyond.

The article Commodity Prices in 2014: What's Behind the Plunge? Hint: It's Not Just Oil originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.