From its April 2020 lows, lumber prices gained an astonishing 570% before hitting a high in May of 2021. But in the two months that followed, lumber lost 70% of its value. This dramatic collapse led some to believe that the post-pandemic increase in commodity prices was nearing an end.
But while the volatility of lumber prices was occupying the attention of many traders, the rest of the commodity complex was quietly making significant gains. From just prior to the pandemic, copper prices have gained 55%, while aluminum prices have gained 65%. Even crude oil, which was conspicuously late to the rally, has climbed in recent months and now sits at a 30% gain from its pre-pandemic price. And after lumber’s steep decline over the summer, it has quietly risen 80% from 2019 prices.
Economist Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” But what happens when the quantity of money is rapidly rising at the same time that output is being stunted from forces like global supply shocks? Could these factors be bringing on the next great commodity supercycle?
CME Group Senior Economist Erik Norland noted that the last commodity supercycle, in the early 2000s, was from “China having an extraordinary economic boom, and the outlook now is much dimmer for a decade long expansion of commodity prices.” Erik also cites “tremendous supply disruptions around the world that continue to linger” as the primary driver of the commodity boom, but also that “massive central bank monetary expansion and fiscal stimulus are colliding with shortages to push prices even higher.” Erik further cautions that high coal and natural gas prices are helping to increase the price of electricity and that there’s some risk of an extended cycle of inflation.
Bob Iaccino, the chief strategist at Path Trading Partners, has pointed out that the current price surge is “more supply-driven,” but the “Producer Price Index is up to eight readings in a row, and when you look at all the indicators, it doesn’t look like inflation is pointing lower.” Bob also believes that the current push towards green energy could turn out to be a significant driver of specific commodity price increases, considering, for example, that “an electric vehicle uses five times the amount of copper that a combustion engine does.”
No time in economic history is identical to another, and the current conditions are both fascinating and troubling for a few reasons. The U.S. government and the Federal Reserve have both acted aggressively to keep demand from collapsing since the onset of the pandemic. The increased spending and low rate policies were designed to be removed once the economy had gathered sufficient momentum. Many economists are concerned that economic stimulus has gone on for too long and we now face the real possibility of extended inflation.
The counterargument is also valid in that supply shocks are hopefully temporary. The government and the Federal Reserve are faced with an extremely difficult task. The most obvious way to encourage the resolution of supply chain issues is to keep demand from falling in hopes that resources will be quickly allocated to encourage greater product mobility. In doing so, there is a risk of doing too much. Going forward, commodity traders will be intensely focused on potential resolutions to the supply problems, but also on indicators that stimulus will change. So far, we’ve heard the Fed express a desire to pull back on accommodations, but we’ve also heard the government propose an additional $4.5 trillion dollars in spending. In the words of Thomas Sowell, “there are no solutions; there are only trade-offs.”
Watch our full OpenMarkets Roundtable discussion on commodity prices above. Watch other episodes here.