Commodity Insight: The super cycle is alive and well

Commodities in the new year will outperform the other major asset classes, stocks, bonds and currencies.

Of course, not all commodities will do well as some will be laggards, not possessing the right sort of bullish fundamentals to spark and sustain higher values.

But as a general rule of thumb and with 2023 at hand, commodities will be the most bullish group of markets anywhere in the new year.

Since late 2020, I have been touting a super cycle for the commodity markets. On Dec. 25, 2020, I posted a column with a headline that read, “Super cycle to lift incomes.”

I wrote: “During the inflationary years of the 1970s to the early 1980s, the commodity markets boomed thanks to several forces. One was weather issues. Another was Russia gobbling up U.S. foodstuffs and in the process drawing supplies to historically low levels.

“Also, lending support was the U.S. dollar that was anemic for years on end. A commodity super cycle is at hand as the sun is finally shining brightly on American agriculture. Incomes will be lifted.”

A year later, on Jan. 8, 2021, I posted a column with a headline “World has a supply problem.”

I wrote: “Grain prices on the final day of 2020 ended on a bullish note seldom seen in the final trading sessions of any year. But in the first week of 2021, the new year, grain prices moved even higher. In fact, the first three trading sessions of 2021, soybean prices rose as much as $1.20 bushel and corn prices 50 cents.

“The reason for the stiff gains is as clear as gin. The world has a supply problem because global and domestic supplies of soybeans and corn are razor thin.”

The primary fundamental forces lifting the commodity markets higher in the new year is clear as gin. There is a shortage looming for a host of markets.

However, in the case of the grain complex, it will not lead the march to higher values. The grain complex may be a follower rather than a leader as it was in 2020 and 2021.

The fate of the grain complex based on what is known today about supply/demand hinges on Mother Nature.

The two big stumbling blocks, obstacles to higher commodity markets in the year ahead, come down to how long the Fed keeps interest rates elevated and how high.

The Fed is determined to slow the economy and pull inflation back to 2% compared to where it is today at 7.1%. There is no doubt it will get the job done.

The other obstacle to higher commodity markets is the Chinese lifting the COVID lockdown and the impact that new health policy will have on their nation. But the COVID mess in China should not last past the first quarter of the new year.

But here is the historic rub regarding the Federal Reserve getting inflation to return to 2%: “Historically, it takes an average of 10 years for a developed economy to return to 2% inflation once the 5% threshold is breached,” the Bank of America said in a recent note.

Moving forward, I can easily envision a scenario where a super cycle unfolds, pushing a host of commodity markets higher and far outperforming stocks, bonds and currencies.

On Dec. 2, a few weeks ago, I penned a column entitled “Stagflation to sizzle while higher rates fizzle.”

I wrote: “It appears a mild recession will weigh on the economy in the new year. It also appears that fears of higher interest rates are fizzling out, but stagflation is about to sizzle.

“And a stagflation economy creates numerous bull markets, as it did in the entire 1970s and into the early 1980s.

“Let the good times roll, I say.”

And I am not alone with my bullish lean towards the commodity markets in the year ahead.

Bloomberg News featured this blaring headline a week ago, “Goldman says commodities will gain 43% in 2023 as supply shortages bite.”

Goldman Sachs argues that raw materials will be best-performing assets. The main reason they are so bullish for 2022 is that “high prices are yet to lead to more supply.”

And at this time the bank favors crude oil, natural gas and metals as the upside leaders. Yours truly, on the other hand, favors the cattle market in the years ahead.

On Nov. 2, I wrote: “The odds are high that the cattle market is on the verge of moving north in a big way. As I stated in this column at the beginning of the year, the upside potential remains to be seen, but with inflation running at its highest level in three decades and the entire globe in the early stages of a commodity super cycle, a reasonable upside target for both cattle cash and futures is $160 to $170.”

But my heart leans towards $182, give or take a bit.

I fully expect commodities, per se, to far outperform the stocks, bonds and the currency markets in the new year.

Stagflation will sizzle for years to come and keep the commodity super cycle alive and well.