NOW?……Building a Major Base in Commodity Prices

By Harold AGJ Davis   27 September 2015,  Author and Analyst at www.prairiecropcharts.com

A period of low cost commodities is not beginning, it is about to end.

Although many commodity prices entered bear markets following major tops back in 2007 and 2008, few seemed to notice at the time. More recently many grains and oilseed prices started major downtrends about four years ago but, again, weakness was ignored. Oddly, it was not until the last domino fell and the price of crude oil collapsed that pundits took notice. Roused from their analytical lethargy, some have concluded that commodity and raw material prices could emulate the 1980s and stay weak for years. They are very late and likely to be wrong.

The world has changed a great deal over the past thirty years, and price behaviour will not be the same. For starters, the global population has added at least two billion people. Moreover, the new economies of China and India have created more than 500 million middle class consumers with expectations and demands that rival Western shoppers. The demand for commodities is now much greater and possibly much less elastic. Once someone becomes accustomed to meat and edible oil in their daily diet, it is hard to go back.

Moreover, governments of the large and wealthy nations seem committed to pain avoidance and the offering of expanded entitlements. Policymakers bail out the banks and enhance the baby bonuses. True, Greece has been treated harshly, but, so far, it is the exception that tests the rule. All things being relative, the word is out that OECD countries enjoy prosperity and the stampede of illegal immigrants across continents proves the case. Therefore, unlike the 1980s, the current recession or economic stagnation in many OECD countries might not cause commodity demand to contract by very much.

Turning to the supply side of the equation, rice might be providing a clue about the future. The September 24^th, 2015 Grain Market Report published by the International Grains Council (IGC) shows that the total use of rice has been greater than production for several years. Could there be production limits that some commodities may be approaching? As yet, this has not caused a crisis because diets can be varied and substitutions made. Rice noodles can give way to wheat noodles and, these days, the world seems to have a good supply of wheat. How long will that last? Recent months have seen the emergence of a powerful El  Nino that is likely to effect this winter’s southern hemisphere crop production and possibly spill over into next spring’s northern hemisphere planting season. Future abundance is less than assured.

Price can also effect supply. The IGC compiles the Grains and Oilseeds Index of prices which clearly demonstrates that grains and oilseeds are cheap by historical standards. Apart from encouraging careless consumption and even waste, low prices pose a problem for farmers because their gross revenue shrinks and then they have less money available for fertilizer, pesticides and herbicides. The consequence of using a lower level of inputs is that crop yields per acre can decline. So, the same area under cultivation is less productive and available supply shrinks. Expect this to be a factor influencing the 2016 South American crops now being planted.

For those that think that a transition by commodities from abundance to equilibrium on the way to scarcity is still a long way off in a distant future, take a fresh look at price behaviour. Specifically, review the long term monthly charts of rice, wheat, soybeans and corn. The monthly Relative Strength Index (RSI) readings have been very low consistent with oversold conditions at the end of bear markets while the monthly Moving Average Convergence-Divergence (MACD) indicators show actual or impending “bull crosses”. Grains and oilseeds look far advanced in their bottoming process.

When will Bay Street, Wall Street and the Fed notice?  It may take a rally in crude oil prices following the bankruptcy of marginal producers to prove the point, but this process could be hastened by interest rates coming unglued from zero. It will be interesting to see if frackers are as good at managing their balance sheets as they have been at finding oil. However, for chartists who need a reminder about how fast a trend can change, use Google to look up “tea price chart” and follow the link to www.indexmundi.com then click on the 25 year chart.

Harold AGJ Davis is the Author and Analyst at www.prairiecropcharts.com