Publication Date: May 3rd 2023
Think inflation is going to continue downwards? Some “food” for thought, in May 2023:
Sugar made ten-year highs.
Robusta coffee futures reached 12-year highs.
Cattle futures made all time record highs.
Orange Juice futures made all time record highs.
This is so called “Agflation”.
“The recent rally — which threatens to add to costs for manufacturers of everything from fizzy drinks to baked goods and maintain pressure on global food inflation…” – See more on sugar, here.
“In the case of cattle and beef, the shortages are linked to the long established cattle cycle, where numbers wax and then wain over a period of 10 years, give or take a year or two.” – See more on cattle, here.
While broad based inflation metrics remain elevated (US CPI 5.0%), they have softened substantially since the 40+ year peaks reached in 2022. A positive for the consumer and the economy, we believe this recent trend could come to an end. We have seen this cycle before.
After surpassing 6% in 1970 CPI dropped below 3% in 1972 before surging again to over 12% in 1974.
Inflation then softened a second time to 5% in 1976 before reaching a record 14.6% in 1980.
As depicted below in Figure 1, there were a total of three instances (green boxes) in the 1960s and 1970s when rising interest rates initially were able to counter-balance the Demand-pull drivers of inflation (principally demand for manufactured goods) and drive inflation down. But as we believe is the case today, the Cost-push inflation structural drivers (commodity prices, rising wages, etc.) ultimately proved to be the dominant driver (lesser affected by central banks interest rate hikes) and inflation accordingly resumed its upwards trajectory for most of this period (red boxes).
Figure 1: Fed Funds Rates and CPI Throughout the Inflationary 1960s and 1970s.
Source – Auspice Capital Advisors Ltd. and https://fred.stlouisfed.org/
Also of note, in three of the four periods inflation increased (red boxes in Figure 1), the Fed Funds Rate was typically at least 1% above CPI (in the fourth they were generally the same) whereas today the Fed Funds Rate still remains below CPI. As such, expectations for the tapering of continued hikes may be premature and further rate increases could pose further stress in equity and fixed income markets.
Not only do we believe rates could continue higher but also “agflation” and Cost-push inflation more broadly could soon dominate and drive inflation back upwards as occurred historically. Over recent years we have been pointing to the capital expenditure (CAPEX) heavy metals and energy sectors' structural shortages and the declining CAPEX in the space, problems that we think will take many years if not decades to resolve (see more here). However, commodity shortages - from metals and mining to energy and ags - are much broader based and we are seeing new evidence of that today in markets typically not in the headlines. As we have said time and time again, there’s a lot more to commodities than oil and gold.
If we focus just on the agricultural markets and emerging agflation, we see increasing global supply concerns and record shortages in many food staples developing in 2023:
“Global Rice Shortage Set to be The Biggest in 20 Years”, see here.
“Fears of Global Sugar Shortage Drive Prices to Decade High”, see here.
“Global Orange Juice Prices to Remain Higher For Longer”, see here.
“Smaller herds trigger record cattle prices and pricier beef”, see here.
“Coffee Prices Surge As Global Supplies Shrink”, see here.
On the contrary, some key agricultural markets such as corn and wheat have remained under pressure in recent months, reflecting the diversity and evolving opportunity in this dynamic asset class.
It is our opinion that the world is short most commodities, but that does not mean they will all go straight up, or that they will all go straight up at the same time. As investors who piled into gold in 2020 and 2021, and energy more recently in 2022 can attest, it can be tricky to time these commodity trends.
At Auspice we don’t have a crystal ball, but we do believe we have demonstrated compelling trend capturing and risk management capabilities for over 17 years, arguably most important in this asset class. If there is one thing we are most confident in, it’s that volatility, particularly in commodities, will persist. In this environment there are few better strategies than agile tactical trend-following commodity trading strategies in our opinion.
Disclaimers Below
REFERENCES
2. https://www.producer.com/markets/smaller-herds-trigger-record-cattle-prices-and-pricier-beef/
3. http://www.auspicecapital.com/alt-invest/2022/9/1/commodity-supercycle-update-where-are-we-today
5. https://www.bnnbloomberg.ca/fears-of-global-sugar-shortage-drive-prices-to-decade-high-1.1906723
6. https://www.foodmag.com.au/global-orange-juice-prices-to-remain-higher-for-longer/
7. https://www.producer.com/markets/smaller-herds-trigger-record-cattle-prices-and-pricier-beef/
8. https://www.barchart.com/story/news/15741928/coffee-prices-surge-as-global-supplies-shrink
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