Commodity Supercycle Beginning?

Ramp Report #5 - Commodities continue to go straight up as the war rages on...

Author

Ramp Capital
March 06, 2022

Commodity Supercycle

Many market participants believe we could be on the cusp of another commodity supercycle. A supercycle is defined as a sustained period of expansion, usually driven by robust growth in demand for products and services.

Commodity price supercycles are extended periods during which commodity prices are well above or below their long-run trend. They are expected to last much longer than business cycles, which, in Canada and the United States, have lasted six years on average in the post-war period.

The cycle that began last year continues to grind higher as the Ukrainian crisis develops and seemingly becomes worse each day.Let’s look at some of the biggest movers in the commodity space and why they are so important:

Wheat:

Wheat hasn't gone parabolic, it's gone straight vertical. This is extremely concerning for millions of people around the world, particularly poorer countries where food insecurity is a real problem.

Global food prices reached an all-time high in February, the Food and Agriculture Organization (FAO) reported on Friday.

The FAO Food Price Index (FFPI) averaged 140.7 points in February 2022, up 5.3 points (3.9 percent) from January and as much as 24.1 points (20.7 percent) above its level a year ago. This represents a new all-time high, exceeding the previous top of February 2011 by 3.1 points. The February rise was led by large increases in vegetable oil and dairy price sub-indices. Cereals and meat prices were also up, while the sugar price sub-index fell for the third consecutive month.

Fertilizer:

Russia is the world’s biggest exporter of fertilizers, but its war with Ukraine has disrupted shipping and driven up prices for natural gas, a key ingredient for fertilizer manufacturing. Western sanctions, including against Russian banks, could further curtail exports by constraining financing. 

Fertilizer prices had already more than doubled over the past 18 months, hitting US farmers as they prepare for the 2022 growing season. 

Gro Intelligence stated: 

A prolonged disruption to the global supply of nitrogen and potash nutrients could cut into crop production in many parts of the world, for both the 2021/22 marketing year as well as 2022/23, at a time when food prices are already at record highs. In addition, damage to infrastructure and the difficulty of farming during an armed conflict could impair Ukraine’s ability to produce and export important agricultural commodities, especially wheat, sunflower, and corn. 

This is a very troubling trend indeed.

Coal:

European countries are looking to establish energy dependence from Russia, which has now led to a resurgence in coal. Thermal coal hit a record high of $446/metric ton this week.

As reported by the WSJ:

In the days af­ter Russ­ian troops crossed over Ukraine’s bor­der, Poland asked Aus­tralia if it could sup­ply coal that could dis­place Russ­ian im­ports. Italy’s prime min­is­ter has sug­gested re­viv­ing coal-fired power plants be­cause of fears of a break­down in nat­ural-gas sup­plies from Rus­sia. Ger­many sig­naled that it might ex­tend the life­span of coal plants that were due to close by 2030, days af­ter it sus­pended cer­ti­fi­ca­tion of a pipe­line that would have dou­bled the vol­ume of gas it im­ports di­rectly from Rus­sia.

Oil and Gas:

During an interview on Sunday, Secretary of State Antony Blinken said the U.S. and its allies are considering banning Russian oil and natural gas imports in response to the country’s invasion of Ukraine.

“We are now talking to our European partners and allies to look in a coordinated way at the prospect of banning the import of Russian oil while making sure that there is still an appropriate supply of oil on world markets,” he said. “That’s a very active discussion as we speak.”

Cue the recession drums.

Meanwhile, the national average for a gallon of gas hit $4.009 on Sunday, according to AAA, which is the highest since July 2008, not adjusted for inflation. Adjusted for inflation, average gasoline prices would need to be around $5.30/gallon to match prices from 2008. Prices have been rising at a fast pace—up more than 11% in the past week, +16% in the past month, and +46% in the past year. 

Based on an analysis from Bloomberg:

Americans no longer spend a lot at the gas pump, but they’re reminded of the price every time they drive. At 3.8%, fuel, electricity and power’s share of average disposable personal income in January was back to where it was in late 2018. That’s nowhere near the spike of 2008 or the panic of the late 1970s. Rising wages and vehicle efficiency mean $3 gasoline isn’t the scourge it once was.

Yet its psychological impact, paired with rising monthly utility bills and the sheer pace of increase, make it a growing problem. Gas prices add to broader inflation and provide an easy narrative to attack Biden’s decarbonization agenda as unaffordable. Since motor fuel represents about 60% of the energy basket, its path from here to November’s midterms is the most critical — and its cost was rising already even before Russia’s tanks rolled in and oil nosed above $100 a barrel. If prices don’t ease, Biden will have a difficult time convincing voters they’re better off.

Maybe we’ve had it too good for too long. The war between Russia and Ukraine really highlights how fragile our global trade system is and we are only just beginning to see the ripple effects. I’m afraid it will get much worse before it gets any better.

It’s never too late to start that garden...

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