In 2001, commodities (adjusted for inflation) were the cheapest they had ever been in the history of capitalism and this marked the end of their two decade slump. Since then, tangible assets have performed very well indeed.
Despite the recent gains, the commodity complex is one area, which (in my view) is still depressed and undervalued. Financial assets were in a bull-market over the past two decades and going forwards I expect tangible assets to boom.
Gold and silver are extremely depressed and will shine over the coming years. Adjusted for inflation, in 1980, gold peaked at $2,100 in today's dollar terms. Yes, the yellow metal is now trading at a 17-year high but at $465 per ounce it is still undervalued when compared to the ocean of money being printed by the central bankers. Make no mistake, the golden bull is very much alive and will remain active for a few more years. I have no doubt in my mind that gold prices will be significantly higher in 3-5 years time but other commodities may appreciate much more than gold.
Sure, the current paper money system is both immoral and corrupt as it confiscates savings through inflation. Sure, gold is the honest, timeless store of value. But as investors, we must not get too emotional about any item and this includes gold. After all, our aim is to maximise profits and protect our wealth from inflation. So, we must remain vigilant and open minded about other opportunities, which present themselves.
Up until now, tangibles such as industrial metals and energy have surged but they are now due for a correction. However, certain sectors have not appreciated yet and offer exceptional value for the long-term investor.
Agricultural commodities in particular remain extremely neglected and here lies a fantastic opportunity. Food items such as sugar, corn, wheat and orange juice have not gone up much and are still close to their all-time lows adjusted for inflation.
It is worth noting that over the past few months, oil prices have risen substantially. However, food items have so far remained flat. This discrepancy is not sustainable and over the months ahead, food prices will also head north and catch up with other commodities. Over the coming 18-24 months, I expect agricultural commodities to provide the best returns with a minimal level of risk.
One of the best forecasters for any market is supply and demand. In the case of agricultural commodities, supply and demand is completely out of whack! Asian demand is rising, populations are soaring, weather patterns are changing and global food stocks are low. Furthermore, due to acute shortages of cultivable land, it may not even be possible to increase the future crop easily.
Over the past 5 years, global food consumption has already exceeded production, resulting in shrinking food reserves. One thing is for sure; whether the global economy slows down or not, human beings will not stop eating. Therefore, over the years ahead, the price of raw food items will have to rise.
The majority of food items such as corn, wheat, soybeans, orange juice and sugar are all close to their all-time lows adjusted for inflation!
Sugar remains one of my favourite markets. Global stock-piles of sugar are now at a 10-year low thanks to a bad crop in India last year. As you can see from Figure 1 provided below, sugar is now trading at 10 cents/pound, which is extremely depressed compared to the 65 cents/pound recorded in 1974. At today's levels, sugar (adjusted for inflation) is trading at a massive 95% discount compared to its all-time high!
Figure 1: World Sugar (spot cash, cents per pound)
For sure, depressed markets can remain oversold for a long time. However, several factors have evolved lately, which are now pointing towards a booming sugar market ahead. Brazil is the largest producer of sugar and in the last season it was responsible for 19% of global output. Brazil also happens to be the world's largest exporter of sugar and last year it was responsible for 33% of global exports.
What is interesting though is the fact that Brazil also converts its sugar crop into ethanol, which is used as a fuel to power automobiles. At present, all automobiles in Brazil mix ethanol with petrol to power their engines. As the oil price continues to climb, expect Brazil to convert more and more of its sugar into ethanol - a cheaper substitute for oil. The greater the production of ethanol, the less sugar available for export.
Despite diabetes, Dr. Atkins and the South Beach Diet, humanity's love-affair with sugar continues. Take a look at Figure 2, which shows that global demand for sugar continues to grow at roughly 1% a year. American per-capita consumption of sugar comes in at 60.9 pounds a year, which is exponentially higher than the sugar consumption in China. It is a fact that sugar consumption increases dramatically as a nation becomes more affluent hence indulgent. History has shown that as human beings become prosperous, they tend to discard rice and vegetables in exchange for soft drinks, chocolates, pastries and junk food - all laden with sugar! As the 1.3 billion Chinese become wealthier, they'll start getting a sweet tooth as well. My recent trip to Shanghai confirms my viewpoint. Urban Shanghai is now bustling with chocolate and ice-cream shops whilst similar transformations are taking place in most Chinese cities. The Chinese middle-class is now turning to trendy "imported" junk food with a vengeance.
Despite depressed per-capita consumption, China is expected to import 1.5 million tons of sugar this year and this is a huge jump from last year's figures.
According to the latest CRB Yearbook, global domestic sugar consumption is expected to come in at 140.5 million tons. Global supply is tight and estimated at 141.7 million tons.
Figure 2: Love-affair with sugar continues!
As I have explained above, demand is rising, supply is shrinking and global sugar stocks are dwindling. In summary, it will not take much for demand to zip right past supply and prices may go up a lot over the coming months.
A lot more follows for subscribers...
