Follow the Trend, Or Find Cheap Commodities
Commodities are a success story in 2020-2021, after the crash in March 2020. Many of them went to new all-time highs like gold, copper, palladium, lumber, rhodium, iron ore. Others aren’t topping but reached relatively high levels, or, at least, the pre-pandemic territories like crude oil. Production bottlenecks and inflation fears, money printing, and a low-interest environment are pushing prices higher. But the higher commodity prices also increase inflation expectations–a vicious circle is forming. Mining stocks are booming, too.
Investors who aren’t engaged in this market may ask, are there any commodities with a decent valuation to buy? Or have I missed the train, is it too late, are all products overpriced? Traders using trend following strategies may want to buy assets already booming. Others, the contrarian investors, use to look for lagging names in the market.
The Goldilock Situation in the Commodities Market
All commodities are moving upwards in recent weeks and months. But some are still on relatively low levels, far from all-time highs. That may be the ideal situation, the “goldilocks” environment where trend following meets fundamental and contrarian strategies. Others are speaking about “commodity supercycles” and are expecting a further colossal bull run.
For the sake of the contrarian view, I searched the data tables for commodities still in relatively low territories. In five or ten years, futures prices of orange juice, cocoa, cotton, arabica, robusta coffee, and platinum were lagging. I charted the prices to see their long-term performance.
Are Real, Inflation Adjusted Commodity Prices Very Low?
But I also adjusted the prices with inflation. It is easy to say “this commodity reached an all-time high,” but if the previous top was 20-30 years ago, the new record might be fake. Inflation changes the valuation in the long term. If we talk so much about inflation this year, why not use inflation-adjusted data?
(I used the US dollar urban consumer inflation index on Tradingview, “CPIAUCSL,” dividing it with the January 1990 value of 127,4. So, on the charts with red lines, the inflation-adjusted prices reflect the January 1990 value of the dollar.)
1. Orange Juice Seems Very Cheap
In approximately 45 years, orange juice prices more than doubled–but in the 1990s-dollar value, they are 50 percent lower. More important, the adjusted futures price only sunk below the actual price in some shorter periods, around 2004, 2009, and 2019. Orange juice seems still very cheap historically.
In the short term, many factors influence the juice price, like the weather in Florida and Brazil, the import prices from developing countries (Latin America, in the first place). Last year, the quarantines, restrictions caused workforce shortage on the plantations. In the long term, the extension of the farmland used for orange production, the imports, and the changes in consumer habits are essential pricing elements.
2. Cacao Is Not the Cheapest Commodity Today
Cacao or cocoa futures price is 19 percent lower today than in December 1979. Inflation-adjusted, it fell much more, 76 percent already, but this crash happened in the 80s. Since then, it was sometimes below today’s level and sometimes above. Since the year 2000, approximately, I see no clear price trend.
It doesn’t seem too expensive nor too cheap. For example, in 2017, it fell below $1800. Today, by $2463, it is 37 percent higher. But also far from the previous record highs.
3. Coffee Prices in a Moderate Range
Coffee price was much higher in the 70s, and it reached $300, which would be $650 on January 1990 price level. Later in the 80, it slumped, similar to cocoa, And in the last decades, the inflation-adjusted price was often below the actual price for long periods. For example, in 2000-2005, or 2017-2020. I see a strong momentum upwards this year, but the bitter, dark product is also more of a moderate price range today. Historically, it isn’t cheap.
(I wrote about coffee in December, as it was $123. Today, it is 152.90, 24 percent higher.)
4. The Past Tops of Cotton Are Luring
Cotton prices exploded in 2011 but were moving in a range after that. The inflation-adjusted price was often below the actual levels. It seems neither too expensive nor too cheap. But if rumors about the commodity supercycle come true, or supply shrinks, demand jumps, it could easily double as much as in 2011, 2005, or the 1970s. The question is how much we have to wait for this.
5. Platinum, Inflation Adjusted, Is Much Cheaper Than Before
This precious metal, used in catalytic converters in the first place (similar to palladium and rhodium), seems not very cheap considering the last few years. It was moving mostly in a channel between $800 and $1,000, and Friday, it closed at $1,254.5. But older investors may remember the times as platinum was over 2,000 and much more worth than gold. It was the “rich men’s gold.”
Platinum struggled with oversupply in the last years, perhaps, a whole decade. But a new hope for platinum investors and miners is in sight. As this economic portal wrote about palladium and platinum:
Both are benefitting from a rebound in auto production and tightening emissions limits, and some automakers are switching to platinum from palladium to save money. The move to electric vehicles threatens demand, but platinum should benefit if hydrogen fuel cells that use the metal also become widespread.
How to Buy These Cheap Commodities?
Cotton, orange juice, coffee, and cocoa are part of the “soft commodities” or “softs” group. (And also sugar and lumber.) You can also invest in these products via softs ETFs. ETF DB listed six of them in the USA. But only one invests in various commodities (sugar, coffee, and cotton, iPath, JJS). The others target only one material.
Interestingly, these funds are very small, with only $190 million asset value in total. This fact indicates that they are neglected, not at the center of investor interest. If, on the other hand, investors discover this sector, it could bring a big rise in prices. (Of course, some of these can also be found in ETFs which buy agricultural products.)
Softs ETF in Europe
In Europe, I found one exchange-traded fund, the ETFS Softs DJ-AIGCISMETC (OD74), which also contains three elements, coffee, cotton, and sugar. (In the long term, it doesn’t seem a good idea to hold commodity ETFs or ETCs, because the major part of the time, the product prices are in contango. Which causes rolling losses for the buyers.) (Read why: Crude Oil is An Extremely Dangerous Play.)