BHP Billiton Limited (ADR) (BHP), Vale SA (ADR) (VALE), Rio Tinto plc (ADR) (RIO): The Window To Buy Low On These Commodities Is Closing Fast

When the Federal Reserve launched its plans to stimulate the economy through quantitative easing in 2009, virtually all asset classes were expected to benefit as the massive increase in liquidity would trickle through the markets. Indeed, commodity prices initially surged in tandem with stock and bond prices.

Yet commodities simply couldn’t keep up, and eventually faltered. Over the past two years, the S&P 500 index has risen 40%, while the iPath Dow Jones UBS Commodity Index Total Return ETN (NYSEARCA:DJP) has fallen 20%. (The fact that crude oil accounts for roughly 20% of this exchange-traded fund (ETF) means that results would have been even worse if crude oil were excluded.)

Yet a case can be made that the storm clouds over commodities are starting to part. And as always, it comes down to supply and demand.

On the demand side of the equation, the discussion has focused on China, which had been showing signs of a rapid economic slowdown in the first half of 2013. Yet in recent weeks, various data suggest China’s slowdown may not be as bad as feared. In a Bloomberg article this week, a fund manager at Shanghai-based Dragon Life noted that “Signs are emerging that China’s economy will rebound.” In fact, several economists have recently boosted their growth forecasts for the Chinese economy after a series of earlier downgrades.

But perhaps it’s time to think about commodities in a global light. The Chinese market is surely important, but both the U.S. and Europe each account for one-fourth of global economic activity, and signs are pointing to growth (albeit off of a low base) in those areas well, which should lift demand for commodities.

Investors also need to track the supply side of the equation. A wide range of mining companies, from BHP Billiton Limited (ADR) (NYSE:BHP) to Vale SA (ADR) (NYSE:VALE) to Rio Tinto plc (ADR) (NYSE:RIO) have all removed billions of dollars of new mining projects from their development slate. There is always a lag time between changes in capital spending and the impact on industry output, but the stage is set for a more constrained supply picture in 2014 and especially 2015.

Meanwhile, various commodity prices are showing signs of a rebound, or are at least forming a bottom. Take copper, for example, which had been in freefall, until recent economic clues out of China boosted sentiment.

If copper has indeed found a floor, then Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is well positioned for upside, as I discussed recently.

In a similar fashion, agricultural commodity prices are showing recent signs of stabilization after sharp drops. Corn prices, for example, appear to have fallen to a level that has led poultry and cattle farmers to step up their purchases.

And the spot price for soybeans appears to have also made a bottom.

Perhaps the best way to capitalize on the apparent bottom in agriculture prices is the PowerShares DB Agriculture Fund (NYSEARCA:DBA), which made a 52-week low in early August before a recent modest rebound.

Investors should also explore the opportunities emerging in coffee after prices plunged to multi-year lows in the face of a robust global harvest. These sharp swings in coffee always tend to set the stage for their own reversal as low prices lead some major coffee traders to withhold supply from the market. The iPath DJ-UBS Coffee Subindex Total Return SM Index ETN (NYSEARCA:JO), has plunged from nearly $43 to $23 in the past year, and is well below the $80 level seen back in early 2011.