How Montana is faring in the post-commodity boom economy.

• Author: Barkey, Patrick M.

If you enjoy sleepless nights and watching your hair fall out, then perhaps you should get into the commodity business. The big swings that occur in commodity prices, often due to speculation or events half a world away, make the business of prediction an exceedingly risky one. Yet Montana producers of all kinds of commodities--metals, energy, and foodstuffs--have been mostly winning in the marketplace the better part of the last decade. Sustained high prices for everything from oil to beef have added spark to the state economy and kept tax coffers in Helena flush.

That run of good fortune--from the point of view of producers, at least--has come to an apparent end. In the space of six months at the close of 2014, the International Monetary Fund's index of all commodities fell by a third and has shown no signs of a revival since. Taken collectively, commodity prices are back to the levels of the year 2005. Five commodity prices that are important to Montana--wheat, copper, lead, zinc, and crude oil--are at five-year lows.

For consumers of commodities, this is a great thing. The plunge in commodity prices has been an important driver of the very low inflation rates seen in most economies around the world. But for a commodity-producing state like Montana, lower commodity prices will produce reduced levels of investment, job losses, and softer tax collections. How the adjustment to lower prices will play out in the coming years for the Montana economy looms large in our updated economic outlook.

The Commodity Price Super Cycle

The reason many forecasters think that commodity prices could remain at these lower levels for an extended time is something that has been called the commodity price super cycle. This can be best explained by looking at the historical fluctuations in an index of all commodity prices over the last 25 years, as shown in Figure 1. In the 1990s, the IMF's overall commodity index--which combines prices of energy, food, metals, and other globally traded commodities--exhibited the fluctuations of what might be termed the ordinary cycle. These are the swings in prices associated with interruptions and/or additions to supply and production, as well as fluctuations in demand in the economic cycles of commodity-consuming countries around the world.

The upswing of the super cycle kicked in the aftermath of the Asian financial crisis of the late 1990s and the brief recession of 2001. Over a space of less than a decade, commodity...