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It appears more and more likely that the global commodity supercycle has come to an end. While the recent collapse in oil prices has attracted much of the focus, prices for many commodities across the board have softened. These commodities include energy, metals and agricultural products, all of which are important to Canada. No one has a crystal ball but if the commodity supercycle is indeed winding down, Canada will surely be affected.

As The Economist magazine has regularly reminded us, aggregate commodity prices fell in real terms (with the impact of inflation removed) for most of the 20th century. Prices then took off in 2002-03 with China's growing integration into the global economy. Robust Chinese economic growth and infrastructure development essentially added a one-time boost to demand for resources of all types, and prices responded accordingly.

Between 2003 and 2008, many commodity prices effectively doubled or more in real terms. Turbulence and instability in commodity prices also grew during that period; financial markets increasingly saw commodities as an instrument for speculative investment, not just a product to be bought and sold to meet end demand.

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Following the generalized price drop during the 2008-09 recession, commodity prices recovered into 2010; but many commodities have seen their price tail off since then, due to the combined forces of a tepid and fragile global recovery, financial instability in the European Union, ever-growing efficiency in energy and other resource use, and a steady stream of new commodity suppliers. Each market segment has its own story to tell and the market price on a given day will come down to demand and supply conditions in each specific segment. But over all, it looks increasingly like the commodity supercycle has come to an end.

What next? First, let's recognize that prices are not necessarily returning to pre-2002 levels. Over all, it is reasonable to expect real commodity prices to remain stronger than long-term historic trends, but below their recent highs. Global demand is both structurally higher than before and is still growing for many commodities, particularly in emerging markets led by China. For food products, the prospect of a growing middle class in emerging markets that is eager to consume more protein, combined with weak global productivity growth in food production, should be favourable for food producer prices over the longer term.

Second, as a major commodity producer, there is little doubt Canada will be affected. At first glance, a moderation in commodity prices might appear to encourage more balanced economic growth across the country, by sector and region. Investment and production activity should shift in increments away from provinces that rely heavily on particular commodities and toward other parts of the country. The Conference Board of Canada is projecting this rebalancing to take place in the oil sector in 2015 – mildly stronger economic growth in oil-consuming regions will offset a sharp reduction in oil sector investment in Alberta, Newfoundland and Labrador, and Saskatchewan.

However, Canada is a net resource exporter, so a sustained moderation in commodity prices would invariably affect incomes (unless volume output can somehow be boosted to replace the lost income). The negative impact of lower commodity prices on incomes and wealth will not be limited to the resource-producing regions of Canada. Business operations today are built around complex value or supply chains that draw upon business inputs of goods and services from across Canada and internationally. Reduced commodity-related incomes, investment and production will have a ripple effect extending far beyond the producing region.

A sustained moderation in commodity prices would also affect the value of the Canadian dollar, which has fallen to around 80 cents against the U.S. greenback. If our outlook for commodity prices is realized, the loonie is unlikely to soar back to par any time soon. A likely medium-term scenario would see it settle in the mid-80-cent range, consistent with estimates of Canada's purchasing power parity. A weaker loonie makes exporters with high Canadian content more competitive, but it also reduces Canadians' real purchasing power by raising import costs for businesses and consumers.

In short, commodity prices remain an important driver of Canada's capacity to create wealth. If the supercycle is at an end, our economy will be relatively poorer for it and will have to adapt to that new reality.

Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.

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