Soft commodities are surging amid war and wild weather. It is a great trade for investors, but the threat of further price rises should worry central bankers.
While Donald Trump just sent crude oil prices back above $US90 a barrel with his latest attack on Iran, there’s another commodity price shock building that is equal parts fascinating and terrifying.
In Chicago last week, the price of wheat surged to a three-year-high amid growing concerns that the escalating war between Russia and Ukraine is disrupting one of the world’s most important breadbaskets. Ukraine’s deepwater ports, which handle about 90 per cent of the country’s agricultural exports, remain blocked by Russian forces, while Russia’s port infrastructure has been subjected to growing Ukrainian attacks.
But the move in soft commodities goes well beyond wheat and the war in Ukraine.
Rice is up 57 per cent since the start of the year. Wheat is up 51 per cent. Cotton is up 41 per cent. Soybeans are up 24 per cent. Wool is up 21 per cent. Palm oil is up 20 per cent. Sunflower is up 17 per cent. Corn is up 16 per cent. Tea is up 13 per cent. The surge in soft commodities has been so powerful that it has pushed Bloomberg’s agricultural and livestock total return index above the downwards trend it’s been following for 20 years.
Weather disruptions in various parts of the world – including heatwaves in Europe and wild rains and flooding across Indiana and Ohio – have added to the upward pressure on prices. In Brazil, there is concern that the peak planting season that is under way is going to result in a weaker-than-expected harvest, as surging diesel and fertiliser prices – a byproduct of the war in Iran – threaten to lower crop yields.
For Bank of America’s Michael Hartnett, commodities have become the best way to hedge against the risk that the artificial intelligence trade abruptly turns, or that the midterm elections in the US result in a sudden change in American politics that puts pressure on company profits.
He’s watching State Street’s global natural resources exchange-traded fund, which tracks producers of both hard and soft commodities, as a bellwether for the broad commodities surge. The ETF has surged 35 per cent in the past 12 months, and 23 per cent since the start of the year.
That’s more than four times the return produced by the magnificent seven technology stocks since January.
Ole Hansen, head of commodity strategy at Saxo Bank, says the concerns about scarcity that have dominated energy markets for much of the year are now infecting the entire commodity complex.
“In precious metals, concerns about fiscal sustainability, currency debasement and the ability of bond markets to absorb rising government debt have renewed demand for hard assets,” he says. “Across agriculture, war, weather and logistics have raised concerns about future supply.”
“The commodity rally is no longer being carried primarily by barrels. Bullion and bushels have joined the advance, and with war, weather, trade policy and fiscal concerns affecting different parts of the complex, scarcity in its various forms remains the dominant theme.”
Hanson’s comments came before the war in Iran flared up again on Sunday night, as the US launched its first attacks on Iran in a month. First, the US hit Iranian rocket launchers on an island in the Strait of Hormuz called Larak Island, and later Donald Trump claimed that Kharg Island was “being blown to smithereens.”
In classic Trump style, he posted an AI-generated video of helicopter attack on oil export facilities to mark the moment.
That the US would pick this moment to restart attacks on Iran, and target Kharg Island, which accounts for 90 per cent of the country’s total crude exports, is strange to say the least.
US officials have been talking up an increase in the number of oil shipments getting through the Strait of Hormuz, economic sanctions on Iran appeared to be starting to work and the price of crude dropped below $US86 a barrel last Thursday. But now Trump risks the oil price jumping again, pushing gasoline and particularly diesel prices higher.
Goldman Sachs said on Monday that it expects the profit from turning a barrel of crude into a barrel of diesel will average $US63 a next year, compared with the bank’s earlier forecast of $US27 a barrel.
The combination of more pressure on fuel prices and a surge in soft commodities couldn’t be worse for politicians and central bankers. As US macro investor Tavi Costa of Azuria Capital notes, the move in agricultural prices and energy prices is coming at a moment when housing affordability concerns dominate around the globe, and when widening inequalities are causing polarisation and a tilt to populism.
No wonder big investors such as the Future Fund have done so well out of their commodities exposure in the past 12 months. “None of us own enough hard assets,” Costa says.
Source: https://www.afr.com/chanticleer/this-market-move-is-20-years-in-the-making-rba-and-pm-should-worry-20260831-p60swe