Commodity Insight: My rallying cry for commodities

The first quarter of 2023 has ended, and moving forward, the financial environment for commodities should be far more bullish than what was seen the past few months.

The bearish fundamentals that kept a lid on most commodity markets and in some cases pushed them to steep losses in early 2023 are coming to an end.

The commodity markets should, could, may and hopefully will do well now that the first quarter has come to an end.

There were several negative forces weighing on commodities earlier this year. The main anchor tugging commodities into the red was the Federal Reserve and the rest of the world’s major central banks hiking rates at the fastest rate and most aggressive pace in 40 years.

Higher interest rates have always been bearish hard assets and that was seen again.

From bankrate.com on March 31: “A pause in hiking rates may be around the corner, and the debate about when to stop raising interest rates could be picking up soon. Officials in March raised rates by a quarter of a percentage point, and the largest majority of officials — 10 policymakers — penciled in at least one more rate hike this year. Seven others, however, see at least two more rate hikes.”

Thus, further rate hikes may take place, but the end is near.

My reluctance to be bullish commodities in the first quarter of 2023 was due to the aggressive Fed with interest rates and a sluggish Chinese economy.

In recent months, however, the Chinese economy is rapidly overcoming the COVID-19 virus and springing back to life far quicker than expected.

From a recent headline, “China’s consumers extend economic rebound from pandemic,” in the Wall Street Journal: “A gauge of activity in China’s services sector reached its highest level in more than a decade in March, a sign that Chinese consumers are heading back to stores and restaurants, powering an economic recovery following the end of almost three years of strict COVID-19 controls.

“The reading represents a promising signal for the global economy, which depends on Chinese consumers to prop up growth this year as their counterparts in the U.S. and Europe battle rising interest rates, high inflation and the prospect of a squeeze on lending following turmoil in the banking sector.”

In December 2011, another Wall Street Journal headline stated clearly, “As China goes, so go commodities.”

That headline has become a rallying call for those bullish on the commodity markets. There is no doubt in my mind that “as China goes, so go commodities.”

Also understand there are other bullish forces at work in world commodities that have the potential to lift hard assets, as well. The war in Ukraine, for example, has been underway for a year and has yet to be resolved.

Bloomberg News recently posted a headline that speaks for itself: “Global food supply risks rise as key traders leave Russia.”

The first paragraph reads as follows: “Russia’s grip on global food supply is tightening after two of the biggest international traders said they would halt grain purchases for export from the country.”

Is that a preview of things to come? Since mid-March, China has bought 2.5 million metric tons, 100.29 million bushels of U.S. corn.

China was a buyer when corn prices in the United States were slumping. But on the dip, China turned buyer and there are strong rumors of more purchases to come.

Plus, China may soon buy the dips with U.S. soybean prices, as well. Why, do you ask?

Because the U.S. Department of Agriculture in its most recent ending stocks report lowered supplies well below expectations for corn and soybeans. Historically low, in fact.

From AgWeb.com on March 31: “The March Grain Stocks Report seemed to be the one that grabbed the trade’s attention, with USDA revealing corn and soybean stocks tighter than expected as of March 1, 2023. When those adjustments are combined with the plantings report, analysts say soybean prices could see some excitement this year.”

Moving forward, there are no signs that grains, livestock, metals and the energy markets are growing in size. Ending supplies of each of those commodities remain historically slim.

As the Chinese economy grows stronger, the odds increase that the commodity markets will rise in value.

My rallying cry for the months ahead is to the point and clearly bullish. I am saying loud and clear, “as China goes, so go commodities.”