Are commodity prices about to move higher with low interest rates?

Are commodity prices about to move higher?
Soy production from the United States could be down by as much as 10% this year. But global production may only be down by about 1.6%.

Chris….

Do you see commodity inflation arising in this era of low interest rates? I have casually been reading the business press and there are more articles arising about commodity prices rising, and, henceforth, an appreciation in the Australian and Canadian dollars.

Thank you,
Gary – United States

Farming technology continues to improve alongside production, and localized weather problems like in the U.S. are muted
The adverse weather in the U.S. has cut its total corn production estimates by as much as 10%, but global production is set to fall by about 3%
Crop prices near their multi-year lows; The last time crop futures traded near their all-time highs was when traders thought the Fed’s QE experiment would result in hyperinflation and a collapsing dollar. The opposite happened. All this debt needs to be serviced and that is deflationary. It also bolsters the USD.

Despite the talk of agricultural calamity, global crop yields are still elevated and the effects of the weather in the U.S. have been minimized. We see crop prices rising on the futures exchanges, but their increases have not been as much as originally feared. Swine prices have tapered off after the large rise in the wake of the China Swine flu scare. Cattle prices struggle along multi-year lows.

AUD/USD; There is a high positive correlation to commodity prices. Those who believe commodities are about to rise should be bullish. I do not see anything with which to be bullish. If you think the central banks are out of control, then perhaps go long here. I will sit this one out.
USD/CAD; Same logic applies to the CAD, but with its exposure to better-performing economies, I am slightly more bullish on the CAD overall.
What caused the spike in commodity prices about 10 years ago?
The broad price-adjusted U.S. dollar index published by the Federal Reserve. If investors determine the USD will fall, then commodities will take off again.

Recall about ten years ago when the global economy and financial markets were on edge. The U.S. dollar had been sinking into the abyss and looked ready to take out multi-decade lows and fall further. Commodities of all kinds increased and gold, especially, were telegraphing the fears of investors at the time. Recall the peak oil scam that preoccupied business media, while the preppers were warning of impending societal collapse. That was at the same time the USDX was tanking.

Moreover, there were tremendous worries that Ben Bernanke and the Fed were going to fail with their unconventional monetary experiments and QE. From 2009 to 2011, recall that gold reflected this concern, and it was during that period that gold had its blow-off top. Gold’s price movement coincided exactly to the global investor worries of this possible failure in central bank policy. By the end of 2012, it was clear to me that QE and the other central bank programmes were going to succeed, at least in the eyes of the globalists.

These QE programs were built on uncertainty, and while the great majority of the alt-financial analysts deemed QE to be a disaster, I saw things differently. I understood the agenda and marveled how the banks were able to pull off the stimulus programmes without inflation and loss of investor confidence. As a result, I turned bearish on commodities in general, and specifically, precious metals. As we can see, commodities and commodity-based currencies have been falling ever since.

So where do we go from here?
Commodity bulls should be concerned that gold’s breakout is in isolation.

Once again, the central banks need to resume their monetary stimulus and the Fed mouthpieces have been vocal in its intentions since the market nadir in December 2018. Recall how we discussed that the dollar would be well supported, regardless of Fed easing, because the Fed was undertaking new stimulus due to global uncertainty and not from domestic concerns. The other central banks, especially the ECB and PBOC, desperately needed to commence further dovish and unconventional policy. Soon after the Fed announced its intentions to begin buying up US Treasuries once again, the ECB, BOJ, BAC, RBA, and PBOC “surprised” the markets with announcements of more bond buying, money injections, and short-term rate cuts.

The U.S. economy can withstand higher rates, as the dollarized debt can be spread far and wide. And although the USD should be falling with dovish policy on tap, the other nations are racing to be first. So, I see the USD being well supported here and into the indefinite future.

Debt generation and QE are deflationary

Recall my prior research that lays out all the reasons why this exploding debt generation is not inflationary, but, in fact, deflationary. All this debt generation has produced massive amounts of future obligations for the nations and all this will produce a drag on future economic vitality. It doesn’t matter how low interest rates move, the outstanding principal will continue to explode for future generations. How can the people in these nations bid up prices if the debt obligations continue to grow? Even if everyone gets a universal income stipend, if that payment is as a result of higher sovereign debt and taxes, inflation will continue to fade. People are just taking money from one source and giving it to another, with a cut of it going to bank profits.

Lower rates increase supply and is deflationary

Furthermore, recall my research that indicates that lower interest rates distorts the supply/demand equation. Under a regime of consistently falling rates, equilibrium supply will remain elevated as marginal players remain in business, while established and well-capitalized players enjoy lower costs of capital and can produce additional output profitably at lower prices. We see this in oil and many other industries. With lower costs of capital, equilibrium supply will always be higher. If interest rates rose, producers, in aggregate, would produce less. Higher rates would result in a supply shock and that would be inflationary.

Now, let’s turn to gold’s recent rise. Its higher price above $1,400 was not followed up with any sizable increases in silver and platinum. Gold’s break out has been in relative isolation and it is as a result of investor concern over the central banks’ new policies and experiments with deeper negative rates, which will spread as time moves forward.

Here is the bottom line for those who are looking for a commodity bull run; If you believe that the central banks are going to lose control, longer-dated bond yields will increase, and that inflation will finally surface, then you should buy commodities and gold, and short the USD to the benefit of the commodity-based currencies. If, on the other hand, you are concluding that we will see more of the same and that the central bank programmes are working as intended (not for our benefit, but for the benefit of those at the top), then I would leave commodities alone.

I see more of the latter, so be careful about the commodity perma-bulls who have this next leg-up in commodity prices pegged. If after the recent floods, this is the best farm prices can do, then what will it take for commodity prices to rise. The only answer at this point would be for the central banks to print the money and directly give it to you and me without any offsetting debt creation, and that will never happen.