Several factors point to rising commodity prices

Several factors point to rising commodity prices

05 August 2021 from Anna Svahn

Forward prices for coffee rose by more than 30 percent in one week after severe frosts swept over Brazil and thus affected this year's coffee harvest. However, coffee is just one of several raw materials that have seen prices rise in recent months, and the trend may continue under certain conditions.

When commodity supercycles have historically started, it has been due to cyclical factors interacting with a single structural factor, and that has generally been enough to catalyze sharply rising prices in the commodities sector. This time, the macroeconomic situation looks somewhat different, as more factors than ever interact and may create a perfect game plan for the possibility for raw material prices to continue to rise.

Cyclical factors refer to the balance between supply and demand. Since the previous cycle peaked in 2011, production of most raw materials (with the exception of, for example, palladium and other single metals) has been slightly above demand, which has led to producers being able to build up stocks. When a commodity cycle bottoms out, it is often because producers have produced slightly less over a longer period (in relation to demand, net production naturally increases annually as population and sales increase), which eventually leads to inventory deficits and prices begin to rise again. This happened last year, and one has since been able to see how most - especially agricultural raw materials - have become more expensive very quickly.

Structural factors are more difficult to predict, and affect the price in different long-term. Examples of these are how weather affects a year's harvest, or how political decisions can affect the global supply of an individual raw material. But the most important structural factor that affects the price of commodities in the long term is inflation.

Cyclical and structural interplay

In recent months, several factors have joined in and each has pushed up prices. At first, cyclical stock deficits appeared in prices, then they were driven by additional newly printed money that found its way into the system, and most recently the weather in several different places simultaneously affected agricultural crops further and created even larger deficits.

For raw materials that consolidated after last autumn's price increase, under certain conditions there may be a situation with new acceleration on the upside. Despite the fact that prices have risen by between 30-80 percent in a short time, there may  still be potential for higher prices.

One of the most important signals for commodity prices is inflation, and the CPI in recent months shows that inflation is not at all as transitory as Powell first thought. Although the Federal Reserve has begun to talk about future tightening of monetary policy, it is all the more interesting to look at their actions rather than what they say. In other words, as long as they continue to support buying bonds, there are currently no obvious signs that inflation may slow down.

Historically, only a few of these factors have led to commodity prices soaring, but now they stand here as a united troupe. So fundamentally, it looks like we are early in a long-term cycle for raw materials. However, this may change quickly.

Important legal information

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

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30/09/2022 15:59:22


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