by Bryan Perry

February 9, 2021

As the stock market hits new highs and garners almost all of the attention of the financial media, there is another bull market taking place in the world of commodities, and it’s picking up momentum only a few weeks into 2021. Throughout the current earnings reporting season, there have been numerous references on earnings calls to the rising cost of inputs, pressuring margins for finished products (see chart, below).

Bloomberg Commodities Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This commodity price inflation can lead to either higher prices for goods, lower profit margins, or both. Crescat Capital’s Head Portfolio Manager Tavi Costa put forth some very intriguing commentary last week about the current state of inflation versus the current narrative.

“Of course, with every major developed economy still printing headline and core inflation below 2%, this is not today’s problem, but there is a reason for that: Metrics such as CPI and PCE are politically convenient measures that strip away virtually all basket components whose prices are surging to give central banks leeway to pursue politically acceptable policies of reflating all assets (until the bubble bursts, but by then that will be some other politician’s problem.)

Costa says commodities are off to their best YTD start in 30 years, yet no one is talking about it. Both the CRB and the S&P GSCI Index are off to a very hot start, up 8.1% and 9.7% respectively as of February 5.

Commodity Indices Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Commodity Research Bureau (CRB) Index is a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture, 7% to precious metals, and 13% to industrial metals. The CRB is designed to isolate and reveal the directional movement of prices in overall commodity trades.

Commodities Research Bureau Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The S&P GSCI is a composite index of commodities that measures the performance of the commodity market. The S&P GSCI is the commodity equivalent of stock indexes, such as the S&P 500 and the Dow Jones. A GSCI fund provides a broadly diversified, unleveraged, long position in commodity futures.

Standard and Poor's 500 GSCI Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Below are year-to-date prices of the core commodities that make up the CRB and S&P GSCI Indexes. The largest spikes are in lithium (+40.86%), cobalt (+41.97%), and rhodium (+28.24%) after only five weeks into the new year. Prices of beef, poultry, corn, tea, canola, sugar, cotton, wool, lumber, and rice are all up by mid-single digits, and all manner of energy prices listed below are up by double-digits.

Energy Prices Table

Agricultural Prices Table

Livestock Prices Table

Industrial Metals Prices Table

Metals Prices Table

Source: www.tradingeconomics.com

So, what are the implications of this sudden surge in commodities? While there are huge transformational shifts taking place in the energy industry towards cleaner and greener means by which the world powers up, only about a third of global power capacity is made up of renewable energy (source: www.irena.org). This argues well for natural gas to build on its recent gains.

According to the Global EV Outlook 2020, the sales of electric cars reached 2.1 million globally in 2019, boosting the current global fleet to 7.2 million EVs. In absolute terms, China remains the world’s largest EV market, with 2.3 million electric vehicles in active use. By 2030, the global sales in EV autos and trucks is expected to reach 20% of the market, so don’t expect lithium prices to retreat any time soon.

Apart from energy and transportation, inflationary pressures in the food sector are also cause for concern. Modern farming technology is global at the commercial level. With nearly eight billion people needing to be fed and another billion on the way in the next 15 years, the strain on global food supplies is very real.

World Population Forecast Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Tomorrow’s Key Commodity – Water

The commodity that takes the cake when it comes to future inflation is not traded on an exchange – water. According to Bluefield Research, Americans paid an average of $104 per month in water and wastewater bills in 2020, up more than 30% in less than a decade. Water and sewer bills, which are rising faster than inflation, increased for eight consecutive years, according to a study of America’s 50 largest metropolitan regions. Cities across the country are grappling with aging systems, fewer resources, and extreme weather.

The average water and sewer bill in 50 cities jumped 3.6% last year, marking the eighth consecutive year of increases, according to a study from Bluefield Research. Since 2009, water bills have tripled inflation:

Water and Sewer Service Costs Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Cities across the country are grappling with aging infrastructure that’s costly to repair. Drinking water is delivered via one million miles of pipes across the U.S., many of which were laid in the early- to mid-20th century with a lifespan of 75 to 100 years, according to a 2017 report from the American Society of Civil Engineers – a group which gave America’s drinking water infrastructure a grade of “D.”

Wastewater systems didn’t fare much better, earning a D+. “We’ve been putting off that investment, we as a country, for decades now,” Bluefield Research’s Erin Bonney Casey told CBS MoneyWatch. “And so, there’s a backlog of projects that we need to do, and there isn’t enough money to do all of those projects.”

While cost increases vary between metro areas, rates have increased every year since Bluefield began tracking them in 2012. Water is already unaffordable for one in 10 U.S. households, a share that’s forecast to triple to over 30% within five years, according to a 2017 study from Michigan State University.

How does this play out for investors in 2021? Easy. Consider owning ETFs that track the CRB and S&P GSCI and stocks of companies of natural gas and LNG for the present, renewable energy for the future, EV battery suppliers, agriculture, water utilities, and engineering/construction/aggregates for when Congress finally bites the bullet on massive infrastructure spending this year.

If we are all going to pay more – and in some cases, a lot more – for the basics we use and consume, then by all means own a part of these critical sectors to help offset the cost increases and pad portfolio returns.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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The Junk Bond Index is “Inside 400”

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The Winning Outliers vs. the Scheming Sea Otters

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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