May 15, 2024

Commodity Insight: Murphy’s Law and elevated values

Murphy’s Law is defined as, “Anything that can go wrong will go wrong.” When it comes to markets — and, in particular, the commodity markets — prices that rise to unusually high levels or decline to humbly low levels happen because at some point “something went wrong” with supply or demand, or both. As a result, prices and values moved higher or lower accordingly.

The U.S. Bureau of Labor Statistics claimed grocery prices in September 2020 rose to their highest levels in 50 years. This week, the same organization estimates food prices overall rose another 4.6% since September 2020. And the gains are blamed primarily on the coronavirus pandemic.

However, from September 2020 through this week, Murphy’s Law kicked into gear and a host of ag markets rose sharply, which only added to the increased food prices at the grocery store — as well as home prices, the cost of cars, furniture and so on.

In recent weeks, oat prices rose to their highest levels in history. High-protein Minneapolis wheat jumped to levels not seen since 2012. Cotton prices jumped to a 10-year high. A few months ago, soybean prices hit an eight-year high.

Crude oil prices are now at a seven-year high and natural gas is at an eight-year high. Natural gas, a key input for nitrogen-based fertilizers, has risen sharply around the globe due to low inventories and tighter-than-usual gas supplies from Russia. And fertilizer prices are in the midst of sharp gains, as well.

The rise with energy prices across the globe has been eye-opening. From CNBC News with a headline, “Sharp surge in energy prices threatens economic recovery and is already slowing growth,” the article stated: “There is an unusual coincidence of much higher oil, natural gas and coal prices, combined with other rising commodities and supply chain disruptions. That perfect storm of shortages and higher prices begs the question of whether the economy could go into a serious tailspin or even a recession.”

What has been unfolding since March 2020 is Murphy’s Law disrupting a host of markets. One of the biggest problems moving forward is that there may be more disruptions ahead despite the fact that food and energy values are already elevated. And just maybe, if more things “go wrong,” prices will shoot higher yet.

Over the past few weeks I have stated firmly that the world is in the early stages of a supercycle with the commodity markets. All my work suggests the cycle will run another 10 years, similar to what unfolded in the mid-1970s to the mid-1980s.

From the New York Times with a headline, “A stock market malaise with the shadow of ‘70s-style stagflation,” the article stated: “Many are looking to history to try to make sense of it, which is why Wall Street is chattering about the chances of a return of an economic specter from the 1970s: the toxic mix of sluggish economic growth and high inflation that came to be known as stagflation.”

I can offer a long list of experts, prestigious brokerage houses, renowned analysts, talking heads on television and virtually all members of the Federal Reserve that will argue inflation and or stagflation is transitory. It is temporary. It is nothing to worry about. And they may be right. Or, they may be wrong.

What that long list of experts missed was the impact Murphy’s Law had on markets, per se, following the coronavirus pandemic. It was only a nanosecond after the pandemic was acknowledged that commodities, the ag markets and the energy markets began to ratchet sharply higher. Now, we are staring at grocery prices hugging a 50-year high and a serious energy shortage plaguing the world’s economies.

The reason the “markets” are where they are today is because unexpected events unfolded that sparked higher valuations. Moving forward, it will take time for things to get back to normal.

Take the grain complex, for example. It will take nothing less than two to three more years of trouble-free growing conditions to replenish ending supplies back to where they were prior to 2020.

To do that, more acres have to be sown. But where are those extra acres coming from? Which grain will not get the acres needed? A battle looms next spring over the acreage mix.

It is one thing for Murphy’s Law to impact markets that are not historically elevated. It is another thing for Murphy’s Law to impact markets that are historically elevated.

Today’s markets without an exception are historically elevated by any reasonable measure. It is a perfect setup for Murphy’s Law to keep the supercycle unfolding in the world of commodities going for another decade. Being short commodities is unwise.