March 29, 2024

Commodity Insight: Banking on higher prices

It has only been a few weeks since the Fed embarked on a new monetary policy of unlimited quantitative easing amid historically low interest rates.

In essence, the Fed has promised to allow job creation to rise to full employment and still it will not hike rates. In the past, recessions started when the Fed began to hike rates out of fears that a robust job pool would spark inflation.

Now, the Fed is screaming loud and clear, “We will not hike rates because the economy is in dire need of inflation. We won’t hike rates even with full employment.”

The new Fed policy has brought forth a hotly debated subject. Will inflation in the Unite States finally begin to rise?

Based on what the Fed has promised, yes, inflation should rise in the coming months and years. In fact, several analysts are quick to point out that Warren Buffett, legendary investor and kazillionare, has only recently started to probe the long side of a host of commodity markets, a highly unusual maneuver for him.

In early July, after natural gas fell to a 25-year low, he bought — for $10 billion — the assets of a natural gas company while dumping stocks of airlines and several major banks. Last month, he bought stock in one of the world’s top gold mining companies.

In an article penned by Andrew Hect, entitled "Buffett Gives Commodities A Bullish Blessing," from seekingalpha, he wrote: "Warren Buffett used the occasion of his 90th birthday to announce his latest acquisition. At the end of August, he bought slightly more than a 5% stake in each of the five leading Japanese trading companies. The five trading companies have significant exposure to the commodities asset class. Natural gas, gold and trading companies in Japan reveal Buffett's belief that rising inflationary pressures are on the horizon."

Hect is building a bull case for commodities based on the financial maneuvering of Buffett.

However, stocks have stumbled badly here in the early days of September with some of the weakness being blamed on comments from President Donald Trump touting the idea the U.S. economy needs to be “decoupled from China.”

And from one of my favorite research firms, AgResource, comes the following comments: “The worsening U.S. political rhetoric against China has traders wondering if China will fulfill its purchase pledge on the ‘Phase 1’ agreement. Traders will be monitoring China’s purchases going forward to see if there is any reaction to Trump’s new hard-line political stance.”

In my view, if the political rhetoric between the United States and China gets to the point the “Phase 1” agreement is tossed under the bus, rising inflation will not be a problem for American agriculture. What will be a problem is collapsing prices if China stops or slows its purchases of American ag-products.

The Chinese have been aggressive buyers of corn and soybeans since May, and in recent days soybeans hit an eight-month high and corn and wheat a six-month high.

The last thing American agriculture needs to endure is the Chinese trade deal coming to an end just as the Fed is willing to tolerate and encourage inflation.

On the other hand, what is deflationary are the actions this week of Saudi Arabia, the de facto leader of OPEC. The Saudis decided to slash the official price of crude oil to Asia and the United States.

As a rule of thumb, when the leading oil exporter for the entire world is cutting prices in hopes of sparking demand, there is no bullish spin to the story. Such a maneuver by the Saudis is deflationary, not inflationary.

This week ended with crude oil prices, a leading indicator for commodities, per se, slumping to a three-month low. It also has to be noted that copper prices, another leading indicator for hard assets, ended near a new three-week low. And the major commodity indexes, the CRB and the Goldman Sachs, closed at a one-month low.

The Fed and a host of others may be touting the concept that inflation is about to rise, but this week, based on several leading indicator markets, is suggesting something else may be afoot.

And from my weekly column a few weeks ago, I wrote: “The Fed has removed its bias against strong labor markets and tossed the Phillips curve under the bus. Those bullish commodities such as yours truly are smiling broadly at such a change. Now, if we can only get ending supplies down a bit.”

Sometime after the first of the new year, I fully expect commodities to move considerably higher as the Fed is wishing for. And higher prices will be helped along dramatically by climate change issues in South America and the next growing season in the United States.

Bank on it.