Was 2020 the year of not too many dollars flowing into your bank account? Well, be prepared for 2021 because this will be a year of money flying out of your wallet. And, no, it is not about President Joe Biden’s tax plan. Millions of Americans are getting ready to pay more at the supermarket, gasoline station, and local retailer as the commodities market is poised to initiate a new supercycle. Agriculture, energy, and metal prices are soaring to their highest levels in years, and consumers’ purchasing power is diminishing amid a weaker U.S. dollar. The country might be receiving a history lesson of what life in America was like 50 years ago.
The Commodities Supercycle
Since 2009, commodities had been in a bear market, with many of the grains, livestock, energy, and metal products the public consumed trending downward. This is all changing. Since the end of World War II, the U.S. economy has witnessed this type of bullishness only twice: the 1970s and the 2000s. And it could be years before the current bull run hits a new peak as everyone everywhere does the same thing simultaneously, applying pressure on the supply and demand fundamentals.
According to a recent JPMorgan Chase & Co. research note, the commodities industry is beginning a new supercycle of years-long gains. A supercycle can be likened to a super boom – and bust – that lasts for many years and above-trend movements amid structural changes in demand.
Over the last year, there have been multiple global ingredients for this supercycle recipe: ultra-loose monetary and fiscal policies, export bans, crop failures, strengthening demand, aggressive Chinese buying, and a depreciating greenback.
"We believe that the new commodity upswing, and in particular oil up cycle, has started. The tide on yields and inflation is turning," JPMorgan analysts wrote.
It is not only JPMorgan sounding the alarm. Many organizations are talking about a supercycle reminiscent of the 1970s, focusing on energy and industrial metals. Jeff Currie, head of commodity research at Goldman Sachs, told S&P Global Platts that many aspects of the commodities market are interconnected, so you cannot talk about crude oil prices without discussing iron or copper.
"This is why I jump up and down and pound the table that people don't keep talking about iron ore with your oil outlook. Well, it's really important to your oil outlook. So is the dollar, so is copper, and grains ... So is everything else out there."
How much have prices increased in recent months? Many of the popular commodities, such as corn, soybeans, and copper, have ascended to levels unseen in several years, with more room for growth.
Everything Is Going to the Moon?
U.S. crude oil prices recently touched $60 for the first time in more than a year. After West Texas Intermediate (WTI) contracts fell below zero last spring, oil has been skyrocketing as producers curtail output and market demand is within reach of pre-pandemic levels. When factoring in Middle East tensions, wintry weather, and stimulus hopes, the crude rally has plenty of legs -- like a 1920s flapper.
Natural gas, a so-called bridge fuel, has put together a mini-rally in February from the Arctic-like conditions that have blanketed many parts of the United States. However, industry observers aver that the energy commodity is a long-term play since many economies, particularly China’s, are transitioning to natural gas to power their countries. The $3-per-million British thermal units (btu) price might seem like a discount now compared to where it could be heading over the next five years.
Soybeans surged to a seven-year high of $14. Corn is flirting with an eight-year high of $6. Wheat recently reached a seven-year high of $6.93. Agricultural commodities are climbing on a broad array of factors: the weather in South America, countries instituting export restrictions to curb domestic prices, and inadequate production levels in the United States. But the most significant aspect is Chinese demand, skyrocketing over the last nine months, as the country attempts to refill its strategic reserves. The latest U.S. Department of Agriculture (USDA) World Agricultural Supply and Demand Estimates (WASDE) report anticipates that Beijing is not finished – and producers are having a tough time satisfying this ferocious demand.
Headlines in the metals market are routinely dominated by gold. But while gold is forecast to retest $2,000 this year, it is the industrial metals that are soaring. Copper is testing a ten-year high of $4. Platinum is homing in on $1,400, while palladium is targeting $2,500. Silver is projected to rise to $33 sometime this year due to stronger investment and industrial demand. JPMorgan analysts noted that the boom in metals could also be a result of "unintended consequences" in the fight against climate change since they are necessary to construct renewable energy infrastructure, batteries, and electric vehicles.
Life Is Expensive
Following last month's two-day Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell dismissed inflation concerns, revealing that "we'd welcome higher inflation." But his lackadaisical view of inflation is contradictory to that of many of his colleagues, some of whom have encouraged the public to get used to higher price inflation. Financial markets are pricing in a higher cost of living, commodity prices are skyrocketing, and governments worldwide are spending and printing at levels unseen before. These conditions could make the 1970s look like a period of deflation.
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