If I could handpick a scenario leading to higher commodity prices, it would be an economy with full employment amid robust job creation. Historically, there is a strong correlation between job growth and rising inflationary pressures. The theory behind such a relationship is called the Phillips curve.
But wait! The U.S. economy has the largest number of people working in 50 years. From Reuters News: “The economy has created an average of 205,000 per month this year, double the roughly 100,000 per month needed to keep up with growth in the working age population. At 3.6%, the unemployment rate is the lowest since December 1969.” In my view, the jobs market hints that inflationary pressures should be close at hand.
If I could handpick a single commodity that is a leading indicator for higher commodity prices, it would be crude oil. Over the years, crude oil — Texas Tea, if you will — has been a leading indicator for hints about commodity inflation.
But wait! The crude oil futures market is inverted, meaning nearby prices are trading over the distant contracts. History shows when any commodity market is inverted, the stage is set for a bull market to unfold.
If I could handpick a wildcard that has the potential to spark higher commodity prices, I would choose Mother Nature. History shows that Mother Nature has the potential to take a bear market and turn it into a bull in no time at all. She also has the power take a bull market and turn it into a bear.
But wait! Over the past two weeks, Mother Nature has inundated the entire Midwest with so much rainfall that the total planting progress for all major grains is now pegged to be the slowest start in history.
As a result, grain prices in the United States have been moving smartly higher. Should the rain continue to slow planting progress into late June, it may prove to be wildly bullish for grain prices well into the future.
If I could handpick a single grain market that has been a leading indicator for grain prices, per se, down through history, it would be the lowly oat market.
In fact, the oat market as a leading indicator has been so reliable that an old saying was coined years ago. It goes like this: “As oats go, so go all other grains.”
But wait! This week, oat prices rose to their highest levels since late 2014. Plus, the market is inverted with July 2019 oat futures holding a stiff premium to December 2020 oat futures. The oat market is screaming loud and clear that higher prices for all grain markets are at hand.
If I could handpick a fundamental other than Mother Nature to be wildly bullish for the U.S. ag markets, it would be the signing of a trade agreement with China and an end to the Trump tariffs.
China has pledged to buy $50 billion — yes billion — worth of U.S. ag products for six years, which would impact the balance sheet for most major grains.
But wait! Everyone knows the Chinese want to buy from the United States, but nothing has been inked. Give me a signed trade deal with China and I will show you some rip-roaring bull markets for U.S. agriculture products.
If I could handpick the single most influential ag commodity, it would be corn. In my book, “Haunted By Markets,” in a chapter entitled, “Three Most Influential Markets from April, 2007,” I wrote: “The three most influential of all markets are corn, crude oil and bonds.” Each can have a powerful influence on a related market and each can, under the right circumstances, impact the economy as a whole.
But wait! Corn seeding this year in the United States is the most-delayed in history. The seeding of the crop is so late that in the past two weeks, corn prices have gone from a one-year low to a one-year high, an unheard of upside reversal.
In addition, the fall armyworm in China, which feeds on 180 different types of crops with its favorite being corn, has been devastating Chinese crops. It’s been so devastating that corn prices in China hit a four-year high this week.
From the South China Morning Post regarding the fall armyworm: “‘Corn is central to the global agriculture complex, any deficit in China will necessitate additional imports having wide-ranging ripple effects globally,’ said John Reeve, director of Agree Commodities, an agriculture product trading firm.”
If I could handpick a time when the U.S. commodity markets will begin marching higher and higher, it would be now.
But wait! A handful of U.S. commodity markets are doing just that, and it began about two weeks ago.
And if you wish to learn about the history of the ag markets when corn is in short supply, check out commodityinsite.com.