February 27, 2024

Commodity Insight: Sticking with my forecast

A shortage of food and energy should be coming sooner than later. I fully expect the final quarter of this year and into late 2025 to be a period marked by rising prices for those two basic markets.

Of course, I do not expect the food and energy markets to rise higher in a straight line. There will be intense volatility with prices — and my advice is not to chase strength, avoid selling weakness, but above all maintain a bullish lean.

However, my forecast has not been unfolding as I hoped. In fact, the very opposite has been seen since early July.

The food and energy markets along with most other markets have been working lower through and including this week. For all intents and purposes, being bullish toward any market has been a losing position.

The reason, in my view, there has been pronounced weakness with the food and energy markets, as well as with all other commodity markets, including stocks and bonds, is because the Federal Reserve has been pushing rates upward since March 2022.

The Fed has been on a mission to break the back of inflation and it is doing a good job. A year ago, inflation was around 9.5%, but the most recent reading comes in around 3.5%.

However, the Fed has a target of 2%, which means it has more work to do before its job is done. The old saying, “never fight the Fed,” has merit because, when all is said and done, the Fed gets what it wants.

By hiking rates high enough, demand is destroyed and markets of all kinds tend to decline in value. Hiking rates does indeed hurt demand, but it does not create “stuff,” such as food and energy.

When Treasury bonds go down, interest rates go up. This week, T-bond futures fell as low as 117.15 for front-month futures. The last time T-bonds fell that low was in March 2010.

The yields on the 10-year T-bonds rose to the highest level in 16 years. Existing home sales announced this week fell to lows not seen since 2010.

And from the Washington Examiner on Aug. 23: “Mortgage demand has fallen to the lowest level in 28 years as homebuyers shy away from rising mortgage rates that have hit highs not seen since the turn of the century.

“Mortgage loan application volume decreased by 4.2% last week on a seasonally adjusted basis when compared to the week before, according to a Wednesday report from the Mortgage Bankers Association.”

The reason I have given to explain the weakness with virtually all markets is to blame the red ink on the Fed policy of hiking rates at the fastest and most aggressive pace in 40 years. By any measure, the Fed is getting what it wants, as it usually does.

Still, higher rates and collapsing demand does not cure the problem facing the world moving forward — and that problem is a looming shortage of food and energy.

Here are some sobering comments in the article, “Olive oil is in trouble as extreme heat and drought push the industry into crisis,” from CNN about an obscure market: “The scorching temperatures that have swept southern Europe this summer are not only claiming lives and priming the land for devastating wildfires — they’re also very bad news for olive trees, with olive oil industry experts warning of skyrocketing prices and potential shortages.”

And the problem with the olive oil industry is being blamed on climate change, which is also impacting other ag markets across the globe, as well.

In the United States, crops in the South and West look to be particularly affected, Nicholas Paulson, a professor at the agricultural school of the University of Illinois Urbana-Champaign, told CNN.

“Heat combined with the very dry conditions will impact primary crops in those regions which would include wheat, cotton and corn and soybeans,” he said.

Experts warn of worse to come for food production, as the human-caused climate crisis increases the frequency and severity of extreme weather.

“This is effectively changing the risk profile facing farmers,” Paulson told CNN.

In the same article, Corey Lesk, a climate researcher at Dartmouth College, stated: “We’re on the precipice of game-changing risks — and it’s far from obvious that these won’t push the global food system over the edge, certainly in 50 years, but maybe even in five to 10 at this rate.”

My forecast for higher food and energy markets has been delayed due to soaring interest rates. But, as I stated before, higher rates can impact demand, but it does not create “stuff.”

I am sticking with my forecast.