If inflation begins to rear its head in a meaningful way, something not seen in decades, it will be the result of several fundamental forces converging at the same time.
Let’s take a look at those forces so we can recognize them as they quietly unfold with little fanfare or noise, arriving on the scene like little cat feet, or as fog noiselessly blankets a harbor.
One such force will be further historic fiscal spending measures promoted by the Federal Reserve and Congress. The same measures passed by Congress in March and April resulted in the best third quarter economic growth in history for the United States.
From Markets Insider: “U.S. gross domestic product grew at an annualized rate of 33.1% in the third quarter, the Commerce Department said on Thursday. The reading marks the largest output gain in recorded history, based on data going back to the 1940s. It came in roughly double the next-biggest jump seen in 1950. Economists surveyed by Bloomberg expected a 32% gain.”
The rebound in growth in the third quarter was due to the Coronavirus Aid, Relief and Economic Security Act and the $2.2 trillion given to American citizens intended to revive the economy. The stimulus package worked quite well, which hints loudly that another package will do the same.
Of course, a second package at this point is only talk and no action. But investors and traders looking for signs of inflation on the horizon should watch for another stimulus package sooner than later.
Another theory about inflationary pressures has to do with low interest rates. The Fed has promised to keep rates low for at least another three years.
The theory is clear and simple. If interest rates remain low, it will likely send more money into commodities that remain historically cheap. Money always flows to where it is treated best.
The most difficult fundamental to gauge is demand. You never know when demand will surface, or disappear. But China has been a huge buyer of the U.S. ag markets in recent months and appears to be willing to do more of the same in the year ahead.
By any measure, Chinese demand for the U.S. ag markets is “new found” demand, which is bullish. And the demand from China is drawing down available supplies, which in turn is bullish.
From CNBC News, quoting Jeffrey Currie, head of commodities research at Goldman Sachs: “Given that inventories are drawing (down) this early in the cycle, we see a structural bull market for commodities emerging in 2021.”
And Goldman Sachs went on to state: “The bank sees upside ahead particularly in non-energy commodities like agriculture and metals, citing tightening supply amid adverse weather conditions and greater demand from China. Economic stimulus measures in the world’s second-largest economy have helped to drive demand for metals to its highest level since 2011.”
A year ago, I expressed my concerns over climate change and the impact it could have on the agricultural markets such as grains and livestock.
From Bayer.com: “It isn’t invisible. It isn’t abstract. It isn’t far off in the future, or far off in a different country. Climate change is here. It’s not only in the Arctic Circle, or barrier reefs, but on the farm. And it has the potential to make your next masked trip to the grocery store even more uncomfortable. If climate change goes unaddressed, food prices could rise, availability could drop and the consequence, especially for those that are most vulnerable, could be limited access to food.”
There are only a few weeks left in 2020 and already a bullish case can be built that in 2021 and beyond a host of agriculture markets are headed higher in value.
Right this very moment I can argue that ending supplies of soybeans are already historically tight and a bull market looms large. I can make the same argument regarding cattle supplies in the New Year, as well.
And if the value of the U.S. dollar does a nosedive, as I expect, several metal markets are also headed higher. All my work suggests strongly that inflationary pressures are gaining momentum.
Agriculture producers should seek out the best information they can because, like it or not, “times, they are a-changin'.’”
The key to success in farming and ranching, as always, comes down to marketing, pure and simple. As we rapidly move into an inflationary era, marketing skills need to be honed sharply.
By the way, that sound coming from your front door is opportunity knocking. I suggest you open the door and listen carefully to what opportunity has to say about the inflationary pressures bubbling up at this very moment.
Open the door and listen. What you will hear is “times, they are a-changin'.’”
And then for sake of safety, buckle up!