The eventual end of the coronavirus pandemic is likely to herald a consumption boom, piling pressure on precarious supply chains and boosting raw material prices, according to the Merchant Commodity Fund.
“There’s a huge amount of pent-up demand in the consumer pocket,” said Doug King, head of the RCMA Capital-managed fund, which has assets of $170 million and returned 19.4% last year. “You could see a real surge in the market across all aspects of travel and consumption. I quite like the backdrop.”
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Commodities have been on a tear since March, and have surged to the highest level in more than six years, with rallies in everything from iron ore to soybeans, copper and corn. Goldman Sachs Group Inc., Bank of America Corp. and Ospraie Management LLC are among institutions that have endorsed raw materials as investment plays and predict they have more room to climb.
Dwight Anderson, founder of Ospraie, said in January he saw 100% to 300% returns in total commodities over the next 18 to 36 months. “With no long-term supply projects coming on, unlike in ‘09, with maximum fiscal and monetary stimulus, the combined backdrop and the tailwinds will make this one of the best commodities cycles ever,” he said in a Bloomberg Television interview.
Stretched supply chains will bolster raw materials, said King from the Merchant Commodity Fund. They’re probably way longer than they’ve ever been in the past 20 years because of congestion, paperwork, trade disputes and other hurdles, he said. That’s inflationary because people need to hold much more inventory, increasing demand, and that will support all commodity markets over the next cycle, which is only just starting, he said. “That is the change that I think is going to propel us to maybe some exciting times.”
Currencies will also have a key role to play. “If you have a really strong commodity market, bull market, you’re going to have to see the emerging market currencies appreciate” and the dollar depreciate, he said.
Depleted Inventory
In China, they are nervous about inflation and want to ensure that they have sufficient stockpiles to keep it under control, said King, who used to work for Cargill Inc. and has some three decades of commodities experience. The way the country has been acting in the soybean and corn markets signals that they have depleted much of their strategic inventory, he said.
Asia’s top economy has been on a record buying spree to feed hog herds expanding again after a deadly virus. That demand, and weather woes in South America, have pushed crop futures to multiyear highs. “Can I see $15, $16 beans? Yes, possibly, but it’s had a pretty decent run-up,” King said, referring to soy, which trades around $13.70 a bushel. The market is “really crowded.”
The fund has focused on energy and industrials in the past three years as agricultural markets grappled with oversupply. “Towards the end of 2020, and now into 2021, that’s changed and we again see strong opportunities in the agricultural space,” King said. “We had positive investor inflows in 2020 and continue to see increasing interest.”
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