Commodity markets are in the middle of a perfect storm. The pandemic tightened supply as operations were shut down and businesses drew down inventories in anticipation of a slowdown that never materialized. Wild monetary response coupled with fast demand recovery, creating shortages across the board. Prices shot up for almost all commodities.
During the last week of April, iron ore, palladium, and timber hit all-time highs. Corn, soybeans, and copper recorded eight-year highs. The list of commodities that are up more than 25% year-to-date includes tin, ethanol, palm oil, gasoline, lean hogs, rapeseed/canola, crude oil, heating oil, coal, PTA (purified terephthalic acid, used to make PET bottles), and wheat. This surge comes on the heels of a torrid 2nd half of 2020; we’re not exactly bouncing off a bottom here.
No other asset class could keep up with commodities in the first four months of 2021; they outperformed equities, stomped on currencies, and ground bonds into dust. The only assets that could keep up with commodities were cryptocurrencies (which are also sensitive to inflation) and energy stocks (for obvious reasons).
The commodity run is just getting started. The Biden administration, after passing one stimulus program, is working on two more additional stimulus packages. The pandemic shook the faith of the business community in lean supply chains and just-in-time manufacturing: the new commandment for CEOs is to build inventories and keep production reserves at hand in case of further disruptions. That creates additional demand that will struggle to find supply.
All commodity booms eventually come to an end when new supply comes online and overwhelms demand. But it can take up to half a decade to build sawmills, expand mines, plant new fields, and drill new oil wells. We are going to struggle with commodity shortages for quite some time to come.