Hello, this is Wilhelm. In this blog I discuss some trends I have noticed about the commodities market, and how I believe this could benefit investors.
Whilst the services economy has been effectively shut by lockdown, manufacturing has already recovered, with trade volumes higher than they were before coronavirus. We are actually seeing a boom in terms of commodity consumption, raising prices across the sector – and greatly benefiting producers and investors.
Much of the analysis of this trend has focused on energy, with coal and gas prices creeping up even as oil prices stayed low due to travel restrictions. But there is more to it than that. 53 of the leading 63 commodities are trading at a higher price than they did before the pandemic, and many of those are agricultural products.
Rubber, rice, palm oil, fish meal, sugar, fruits are some of the commodities that are seeing prices rise. Non-energy commodity prices were up an average of more than 16% when compared with the end of 2019. Prices are at the highest average level since mid-2014 and are rising at the fastest rate since mid-2011, according to the World Bank.
Some of this is linked to a strong La Niña cooling in the Pacific Ocean, which is known to negatively impact agricultural production in the tropics and sub-tropics, so we’re looking at tighter supply whilst demand is rising. The FAO has warned that La Niña “puts some countries in Southern Africa, the greater Horn of Africa, Asia and the Pacific at high risk of incurring agricultural losses.”
Most commodities are traded in dollars, so some of the increase may also be caused by the volatility in the dollar, which is having a fall in value of 3-4% in the past year. But the return of manufacturing and boom in merchandise consumption – despite the coronavirus – is likely the most important reason for this favourable market conditions.
In the West, consumer spending on products has remained strong, while spending on hospitality and tourism has been bad because of the various lockdowns. In Asia, where the virus has been more controlled, merchandise spending has also performed better than services.
The result is a manufacturing-led economic recovery in its course, which is not only increasing demand for raw materials, but also for items such as semiconductors, and stretching the capacity of the global logistics system. In China, manufacturers’ electricity consumption rose by 12% in the year to November, compared with a much weaker increase of 8% in services.
Commodity prices tend to see their strongest impact on the poorest countries which highly rely on the export of agricultural commodities and raw materials. That way, they make up significant government revenue. Negative impacts are felt by poorer households in both poorer and wealthier countries, who spend a high share of their income on food, fuel and other items. This means while rising agricultural commodity prices are increasing incomes for producers, they are hurting the lives of many consumers. The best way to ensure that both can prosper through the supply crisis is to encourage investment in production – more land, more yield, more mills, more trade, more products on the shelf, more money for governments.
To summarise, rising demand will ultimately mean a win-win for producers, investors and everybody else. Or as Milton Freedman noted: “Most fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”