If inflation starts to rally its head significantly, which has not been seen for decades, it will be the result of several fundamental forces converging at the same time.
Let’s take a look at these forces so we can recognize them as they quietly unfold with little fanfare or noise, arriving on scene like little cat paws, or as fog quietly covers a Harbor.
One of those strengths will be new historic tax spending measures promoted by the Federal Reserve and Congress. The same measures passed by Congress in March and April resulted in the best third-quarter economic growth in history for the United States.
From Markets Insider: “US gross domestic product grew at an annualized rate of 33.1% in the third quarter, the Commerce Department said Thursday. The reading marks the biggest output gain in recorded history, based on data dating back to the 1940s. It came about double the next big jump seen in 1950. Economists polled by Bloomberg expected a gain of 32%. “
The rebound in growth in the third quarter was due to the Coronavirus Aid, Relief and Economic Security Act and the $ 2.2 trillion given to US citizens intended to jumpstart the economy. The stimulus package has worked very well, suggesting that another package will do the same.
Of course, a second package at this point is just talk and no action. But investors and traders looking for signs of inflation on the horizon should expect another stimulus package sooner rather than later.
Another theory about inflationary pressures concerns low interest rates. The Fed has promised to keep rates low for at least three years.
The theory is clear and simple. If interest rates stay low, it will likely send more money into commodities that have remained historically cheap. Money always flows where it is best handled.
The most difficult fundamental to assess is demand. You never know when demand will arise or when it will go away. But China has been a big buyer of U.S. agricultural markets in recent months, and looks set to do more of the same in the coming year.
In any case, Chinese demand for US agricultural markets is “new” demand, which is bullish. And demand from China is pulling down available supplies, which in turn is bullish.
From CNBC News, quoting Jeffrey Currie, head of commodities research at Goldman Sachs: “With stocks going down (down) so early in the cycle, we see a structural bull market for commodities emerging in 2021. “
And Goldman Sachs went on to say, “The bank is seeing the rise, especially in non-energy commodities like agriculture and metals, citing a tight supply in inclement weather conditions and increased demand for gas. China. Economic stimulus measures in the world’s second-largest economy have helped bring demand for metals to their highest level since 2011. “
A year ago, I expressed my concerns about climate change and its impact on agricultural markets such as grains and livestock.
From Bayer.com: “It’s not invisible. It is not abstract. It is not far in the future, nor far in another country. Climate change is here. It’s not just in the Arctic Circle or the barrier reefs, but on the farm. And it has the potential to make your next masked trip to the grocery store even more uncomfortable. If climate change is not addressed, food prices could increase, availability could decline and the consequence, especially for the most vulnerable, could be limited access to food.
There are only a few weeks left in 2020 and already a bullish case can be built that in 2021 and beyond a multitude of agricultural markets are heading for higher value.
At this very moment, I can safely say that the end of soybean supplies is already historically tight and a bull market is looming. I can also make the same argument regarding the cattle supply for the New Year.
And if the value of the US dollar plunges, as I expected, several metals markets are also heading higher. All of my work strongly suggests that inflationary pressures are on the rise.
Farmers need to seek out the best information they can because, whether you like it or not, “times change.” “
The key to success in farming and ranching, as always, comes down to marketing, plain and simple. As we quickly enter an inflationary era, marketing skills need to be honed.
By the way, that sound coming from your front door is an opportunity to knock. I suggest you open the door and listen carefully to what you have to say about the inflationary pressures that are bubbling up right now.
Open the door and listen. What you will hear is “the times are changing”. “
And then for safety reasons, fasten your seat belt!