Publication Date: August 1st 2023.
Above: Renewed commodity strength is being seen in many sectors such as agricultural commodities. Auspice expects food prices to follow agricultural prices back up, putting a floor and likely reversal in the recently softening of inflation metrics in some countries. Source: Auspice Capital and Bloomberg, as of July 25th, 2023.
As I stare at the calm serenity of a lake, I am sobered by the reality of its dangers. There are risks we tell our kids and visitors about but seldom think much about. And as I reflect on 2023, the markets remind us of their power to defy expectations, analysis and ignore the deafening noise of the financial entertainment media. Who would have thought that in-spite of continued rate hikes and recessionary fears that stock markets (certain parts) would rally to extremes and commodities would be again labelled irrelevant? Like observing the surface of a body of water, it is what’s happening underneath that matters most. The flow, the current, the hazards, the risks. Maybe the answer is below the surface? If we ignore the headlines, distractions and insatiable need to understand and be entertained by it, the answer is hidden below. Perhaps going with the flow, the core trend is what matters most, immutable. Despite what is on the surface, it will change quickly and without warning, price changing with it. Risk and opportunity.
Although headlines and benchmark indices were showing us that commodities are down, what we see is that the global appetite is rising[i]. Capex in commodities has not come back. The demand is growing and supply is not keeping up at any minor disruption[ii].
Ag commodities, those affecting the prices of our daily existence, are higher, some making all time highs in 2023- Sugar, cattle, orange juice, cocoa, coffee. This is reality. While oil and copper retraced from 2022 highs, these less talked about commodities made our daily existence more expensive. Did it seem cheaper to drive? Not really, but the grocery bill and restaurant costs are fresh on my mind.
The surface was calm- observed volatility was low. Headline commodities failed to entertain through the beginning of July. But the underlying current remained swift, and risky. Few saw it. Less participated in it and almost none in the entertainment media caught it.
As such, at Auspice, we want what the market wants. We are agnostic and trend following. We will tread water, aware of the risks, and resulting opportunities, those that the surface does not show.
Are you prepared if current rips you away from calm waters? Life jacket on? The surface is but one perspective, the risks and opportunities lie below. We are watching, waiting and executing. And as we end July, it is sneaking up. We have added numerous commodities in the last couple weeks shifting from flat or net short in Energies and Grains to net long. Just like that.
- Tim.
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Glossary and Definitions
The DBIQ Diversified Agriculture Index Excess Return is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities.
The UN Food and Agriculture World Food Price Index (FAO Food Price Index) is a food price index by the Food and Agriculture Organization (FAO) of the United Nations. It records the development of world market prices of 55 agricultural commodities and foodstuffs.
References
[i] https://www.reuters.com/markets/commodities/oil-ticks-up-opec-cuts-traders-eye-economic-data-2023-07-11/
[ii] https://www.pimco.ca/en-ca/insights/viewpoints/growing-demand-tight-supply-support-commodities-in-2023