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It may not suit the promoters of the World Food Security Summit being held in Rome, but commodities across the world are broadly retreating, most recently after crude oil prices topped apparent choke point levels around $135 a barrel two weeks ago. Since then, benchmark crude oil prices have contracted closer to the $120 a barrel mark, dragging down much of the rest of the broader commodities complex. 

A number of expert observers attributed the apparent peak in oil to the belief that it had risen to a point where it could unleash serious damage on the global economy. There had also been a "decoupling" between oil prices, and the dynamics of the world economy. Oil prices had doubled over the past 12 months, yet the fundamentals of the world economy had, if anything, weakened somewhat.

The dollar was seen as the third factor: a currency in a protracted bear market since early 2002, but now finally giving clues that it may consolidate sideways, if not rise in value. The Federal Reserve, the US central bank, has increasingly signalled that its round of rate cutting is through, thus encouraging more buying of the dollar. A rising dollar is bearish for all commodities, given that a stronger dollar translates into rising commodity prices in other currencies.  

A fourth factor may have been attributed to recent reports that a number of regulators may be investigating the behaviour of certain so-called speculators in commodity markets. While no evidence of direct manipulation has emerged as yet, high-beta speculators may have backed away for the meantime. Allegations of manipulation in spot and futures markets is not supported by price movements in markets characterised by mine-to-consumer contracts, where prices, free of speculator influence, have moved up very sharply in recent years.

The so-called supercycle in commodities, which rose inversely to the falling dollar since early 2002, has also been notable for a number of huge rotational blow offs. First it was (economy sensitive) base metals, seen in the peaking of copper and aluminium, the two biggest base metals, in 2006. This was followed by (reflation sensitive) precious metals, which frothed out in early March this year, and, in between, the world's big agricultural grains. The fourth rotation had been into oil, which may have now blown off, for the meantime. 

In highlighting the risks of investing in commodities, whether it be in the physical materials, equities, futures or exchange traded funds or notes, there are also sub-rotational plays. This has been illustrated by the big agricultural commodities over the past year, where wheat was the first to blow out, and rice the most recent. Soybeans have been holding up of late, as a key feedstock for bio fuels. Troubles in Argentina have also played a hand, which has also underpinned recent strength in corn, also a key bio fuel feedstock.

One factor common to all rotational plays is that after blow offs and corrections, commodity prices settle at higher levels than the mean for the past six years. This phenomenon underpins the reality that commodity prices in general are being re-priced in line with a longer term positive trend in global economic growth, and above-trend industrialization in emerging economies.