Commodity Insight: Time to be bold

The long and agonizing trade war with China appears to be over. It has been underway since March 2018, and despite President Donald Trump arguing that trade wars are “fun and easy to win,” I, for one, am thrilled it is over.

According to reliable sources, Phase One is the new trade deal that will nearly double U.S. exports to China over the next two years. The deal is expected to be signed in early January and go into effect 30 days later.

It is my understanding that China has pledged to buy $40 billion of U.S. ag products annually for the next two years as part of the new trade deal. Keep in mind that in 2017, China bought $24 billion worth of goods and in 2012 bought $21 billion.

It was in 2012 that the CRB index — that is to the commodity markets as the Dow Jones is to the stock market — hit an all-time historic high. When Chinese buying slacked off in 2012, commodity values per se have been on the decline ever since.

The ending of the trade war is flat out bullish. Soon, agriculture producers and traders will look back in time and realize that Phase One of the trade deal was revolutionary bullish for American farmers and ranchers.

Here are some comments from “Haunted By Markets,” in a chapter entitled “Staggering Demand From China,” I penned in May 2011 showing the influence China has on commodities in years gone by. The same will be seen in the future.

“An individual of note has recently emerged as a long-term bull toward commodities. That was a surprise because I have been reading his column for years because he is simply the best financial writer on the scene today.

“He is a legend on Wall Street for his forecasting ability coupled with his wry sense of humor. The writer is veteran financial journalist Alan Abelson of Barron’s.

“As a fan of Mr. Abelson, I read carefully his insightful analysis of the markets and economy. Not once, however, can I recall him wandering into the world of commodities — not once.

“But on May 14, he wrote an article entitled, ‘Paradigm Shift’ with a subtitle summary stating, ‘The world is using up its natural resources at an alarming rate … causing a permanent shift in their value.’

“Mr. Abelson touched on why commodity prices hit the skids in the opening days of May, but quickly begins to quoting from Jeremy Grantham and the GMO website. On that website, a table appears listing China’s outsized appetite for commodities. The title next to the table has a heading that reads, ‘Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever.’

“From that table, here is the percentage of use for various world commodities consumed by the ever-growing and robust Chinese economy. The percentages are eye-opening; cement at 53.2%, iron ore at 47.7%, coal at 46.9%, pigs at 46.4%, steel at 45.4%, lead at 44.6%, zinc at 41.3%, aluminum at 40.6%, copper at 38.9%, eggs at 37.2%, nickel at 36.3%, rice at 28.1%, soybeans at 24.6%, wheat at 16.6%, chickens at 15.6%, crude oil at 10.3% and cattle at 9.5%.”

To us, it means that whatever the day-to-day, or even month-to-month, dips and blips in commodity prices, if Grantham’s right, the long-term trend has no place to go but up.

Six weeks ago, I wrote, “I am a stubborn bull convinced that commodities are buying opportunities on breaks.” And this week, I write, “Welcome, Mr. Abelson and Mr. Grantham, to my camp — the camp of the, ‘stubborn bulls.’”

China experienced food inflation in November of this year of 19%. The primary cause of higher food costs was pork that rose 100% in November.

As we all know too well, pork prices rose sharply because swine fever has devastated the Chinese hog herd, causing it to decline more than a third in the past year. But that estimate seems optimistic. The losses are likely far greater in not only China, but in a host of other nations, as well.

I believe the upside potential for the world’s meat markets is huge with pork destined to be the upside leader. I also embrace what the late Alan Abelson stated years ago, “The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.”

Moving forward, as other trade agreements fall into place, it will become more evident that a structural and permanent shift in the value of basic foods stuffs is unfolding right this very moment, just as predicted in the spring of 2011, just before the CRB index rose to an all time-historic high.

Exciting and profitable times are ahead for U.S. agriculture. Do not be left behind. It is time to be bold.