March 29, 2024

Commodity Insite: Demand for ‘stuff’ greater than supplies

The year 2021 was exceptionally volatile for the stock market, but it still turned in a solid performance. The S&P 500 gained nearly 27%, the Nasdaq was up 21% and the Dow Jones rose nearly 19%. By any measure, such gains are stellar.

However, the Bloomberg Commodity Index gained 27%, its best year in decades, and the CRB Index weighted toward grains and livestock picked up 39%. And because the hard asset markets did so well, the spotlight is suddenly shining on the commodity markets.

When I state with conviction the spotlight is now shining on commodities, I am specifically referring to the major media outlets highlighting the grain, livestock, petroleum, metal or tropical markets such as cotton, coffee, sugar, lumber, orange juice and so on.

Lately, many refer to those types of markets as “stuff.” And because “stuff” did better than paper markets, stocks, bonds and crypto in 2021, the media outlets are touting commodities.

The most recent tout — and a big one at that — came from Barron’s, a widely respected weekly magazine published by Dow Jones Company since 1921. A glaring headline screamed, “It’s Time to Invest in Commodities. How to Do It.”

The first paragraph reads as follows: “Commodities are rarely exciting — and the price of copper, corn, or even oil doesn’t stir investors the way a tweet from Elon Musk does. Yet commodities sit at the crossroads of three of today’s biggest investment themes — rising inflation, a changing China, and the transition away from fossil fuels amid increased attention to climate change.”

Well put, indeed.

Barron’s argues significant trend changes have occurred that will spur a number of commodity markets much higher. Barron’s states the following: “Higher energy prices cause the prices of some agricultural commodities to rise. Farmers use petroleum to power their tractors and other farm equipment, and fossil fuels are used to make fertilizer. The more expensive these energy inputs are, the more likely it is that farmers will plant fewer or raise prices on their produce, driving up the prices of commodities such as corn, soybeans and wheat.”

For over a year, I stated time and again, and to the point of ad nauseam, the world is in the early stages of a supercycle for “stuff.” Based on history, the current cycle has another eight to 10 years to run before it ends.

And the motivating fundamental pushing the “stuff” markets upward comes down to this simple observation that can be etched in stone: Demand is greater than supply for “stuff.”

I have stated several times that the world has a supply problem regarding “stuff.” There is a shortage of virtually everything because not enough capital has been spent over the past decade to increase supplies enough to offset pent-up demand due to the pandemic that spawned serious disruptions in the supply chain.

It will not be easy and it will take time to increase supplies of most ag markets compared to demand. And that is why in 2021 the CRB Index weighted toward grains, livestock and petroleum, and in that order, outperformed most all other markets.

Moving forward, price volatility will ratchet higher than anyone has seen in decades. Keep in mind, however, that volatility is a two-edged sword.

When you happen to be in step with volatility, a great deal of money can be made. When out of step with volatility, your hard-earned money disappears in what seems to be the blink of an eye.

And that, of course, is why agriculture producers, traders and investors should always follow that old Chinese saying, “Always use a stop.”

The grain and livestock markets are in the process of embarking on a multi-year adventure that will be highlighted by intense volatility due to supply shortages. Markets, prices and valuations will be roller coaster like for the foreseeable future.

Buckle up.

Use a stop.

And realize that, for some time to come, demand for “stuff” is far greater than available supplies.

The key to most ag markets near term is the threatening weather conditions, hot and dry in southern Brazil and southern Argentina. The U.S. Plains also remain drought-like with the growing season about to get underway in a few months, if not earlier.

I am quite bullish and suggest ag producers and traders to be open-minded about the potential for a historic rise with prices. After all, demand for “stuff” is greater than supplies.

And do check out commodityinsite.com. There is a new special offer you may find of interest.