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A year ago, the Federal Reserve began pushing interest rates higher at the fastest rate in 30 years in an effort to fight inflation. The Fed hiked rates fivefold and may not be done yet.
However, inflation has dropped sharply with nary a commodity market higher today than where it was a year ago.
And that, of course, is why the old saw, “never fight the Fed” came to be. The Fed usually gets what it wants.
From oilprice.com with a headline, “The commodity price bubble has finally burst,” the opening paragraph reads: “The epic commodity bull run that took off three years ago and saw commodity prices hit multidecade highs has finally collapsed. From oil, gas and wheat to lithium, copper and iron ore, prices of the world’s leading commodities have pulled back sharply across the board.
“The Bloomberg Commodities Index, the most widely used benchmark for the commodities market tracked by 23 exchange-traded contracts on physical commodities and more than $100 billion in assets, has declined 12% in the year-to-date and shows no signs of reversing course.
“The index hit a nine-year peak in May 2022 with commodity prices more than doubling in the space of two years. However, BCOM has since then declined nearly 25%, effectively ushering in a commodity bear market.”
From Bloomberg News with a headline that screams, “Commodity crash signals disinflation is taking hold for now,” the two main highlights of the article are: “Cost of everything from metals to crops has plunged this year” and “Economists see inflation slowing, but warn some prices sticky.”
These two news articles are 100% accurate. The commodity price bubble did burst a year ago and there is no doubt disinflation is taking hold for now.
But markets with bullish fundamentals will continue to catch a bid on weakness, which means some markets and some prices will remain “sticky.”
As markets and prices of all stripes moved lower and lower in the past year two, commodity markets faded that trend and rose sharply in values.
One, according to the Wall Street Journal, was “orange juice that just hit an all-time high of $6.25 a gallon for reconstituted juice and $10 a gallon for squeezed, or not from concentrate.”
The Journal quoted Juday Ganes, a commodity analyst, as saying, “It’s like liquid gold.”
The other commodity market that has moved higher in face of most other commodity markets moving lower is cattle.
From the U.S. Department of Agriculture a few days ago: “Reported prices for a five-area marketing region including Texas/Oklahoma/New Mexico; Kansas; Nebraska; Colorado; and Iowa/Minnesota set a record at $180.44 per hundredweight for the week ending April 16, 2023, surpassing the previous high in November 2014.”
Moving forward, it takes about six to seven years for a young orange tree to hit full size and be productive.
The USDA recently stated the U.S. cattle herd is now at its lowest level since 1962 and will take three to five years to rebuild the herds. And that estimate is loosey-goosey depending on a host of variables from feed costs to the job creation.
Moving forward, the Fed may or may not hike rates in the coming months. But there is no way the Fed is going to encourage orange trees to grow faster, or encourage cattle producers to increase the size of their herds more than what is possible.
Thus, prices for the juice that comes from an orange, as well as cattle and beef prices, will remain “sticky.” Markets with bullish fundamentals trump the Fed every time.
Another group of markets subject to much higher prices are grains as the growing season has arrived and the weather is threatening. The mid-May to mid-June period this year has been the driest in the Corn Belt since 2012.
And here is what the grain complex did in 2012, when hot and dry weather sent grain prices sharply higher:
• On June 15, corn futures moved from $5.80 a bushel to $7.70 by July 5.
• Soybean futures headed higher on June 15, as well, moving from $13.58 a bushel to $17.56 by July 20.
• And wheat prices on June 15 were $6.11 a bushel, but by July 5 kissed $8.40 a bushel.
And the weather pattern this year is more threatening to the crops than in 2012. But this year there is threatening weather in other parts of the globe, as well.
There is crop stress being seen in northern Europe, central Russia and areas of Ukraine.
And from bnn.network comes this headline: “Heavy rain damages wheat crop in China, causing ‘disaster’ for farmers.”
Mother Nature is acting up all over the place. Moving forward, the key to the grain markets here and abroad is the weather, the weather, the weather — not the Fed.