December 04, 2023

Commodity Insight: A new era amid unprecedented volatility

There are several interesting theories on the ag and energy markets that have been unfolding the past few weeks.

One is offered by MarketWatch with a headline that blares, “As food prices rise in June, analysts warn of a ‘tipping point’ for Americans.”

Another comes from Bloomberg News with a screaming headline, “Heat, war and export bans: Global food threats are on the rise.”

The final theory comes from one of my favorite private research firms with no brokerage affiliations, AgResource Company in Chicago, which argues, “A new era of raw material of supply and demand.”

I embrace the theories above and am convinced the world is indeed on the cusp of a new era.

Here are the first few thoughts from MarketWatch: “Food prices grew at a slower pace in June, but economists remain concerned that prices will reach a level where consumers will make dramatic changes in their behavior.

“Food prices rose 3% in June compared to a year ago, according to the latest data from the Bureau of Labor Statistics. After a year of price hikes, consumers continued to see food prices rise, but at a slower rate.”

A year ago, grocery inflation in the United States was pegged at 13.5%, but now at 5.7%. Yes, food prices are rising, but certainly at a slower rate.

But the weather in the Grain Belt remains threatening with the war in Ukraine intensifying greatly this week. And a week ago, India, by far the largest rice exporter in the world, banned rice exports.

In my view, such fundamentals will keep a stiff bid under the ag markets for some time to come.

Bloomberg News states: “As scorching temperatures ravage farms from the U.S. to China, crop harvests, fruit production and dairy output are all coming under pressure. That extreme weather is just one of threats to food supplies that are once again mounting around the world.”

It is being forecasted by most weather services that next few weeks will have temperatures in the Grain Belt 3% to 8% above normal in the hottest part of the summer. In the U.S. grain markets, a corn crop is made or broken in July, a soybean crop in August.

With worrisome heat on tap to blast the crops as headlined by Bloomberg News, the odds, in my view, suggest further yield losses and smaller production for all major grains.

If so, it will mean tighter supplies into 2024 and 2025. Food inflation will likely remain elevated for a longer period than most are willing to admit.

Here are some ideas and theories about food inflation from AgResource a day ago:

• “AgResource’s research suggests that from a high level, the raw material bull cycle remains intact as food and energy supply issues won’t be solved in 2023-2024.”

• “The world needs a greater supply of food and energy.”

• “Incomes worldwide will be record large in 2023 and over the next several years. Consumption will increase.”

• “Sub-$4.50 corn, $6 wheat and $11 soybeans are not expected into 2025.”

The world’s largest asset manager, BlackRock, with $8.59 trillion under management, posted this headline a day ago, “Buy commodities now — fabulous gains for your future, plus fat dividends.”

Written by Rida Morwa, he states: “It’s true that inflation is slowing down, but that doesn’t mean comparative prices will fall. Large commodity-oriented companies are masters at long-term planning. There’s plenty of income to be had for those who are willing to have it.”

Morwa went on to suggest investors should consider the BlackRock Resources and Commodities Strategy Trust, “a closed-end fund that invests in commodity companies, yielding 6.5%. This includes three main categories: energy, mining and agriculture.”

I am not suggesting anyone invest with BlackRock, or subscribe to Bloomberg News, MarketWatch or AgResource. Nor am I suggesting anyone should follow their advice.

All I am doing is showing reputable market sources that all agree that food and energy inflation — though historically high right now — will likely remain that way for some time to come.

This week, the Fed hiked rates by another quarter point to the highest levels in 22 years. The Fed is dedicated to pushing rates north because inflation has a “long way to go” in order to get down to their target of 2%.

Certainly, higher rates dampens demand, but does not create more “stuff.” The world needs more stuff, such as food and energy.

We are entering a new era for food and energy prices that will not be solved until 2025, or later. A new era, highlighted by shortages of food and energy amid unprecedented price volatility.

That is how I see things unfolding in the years ahead. And so do others.