Low inflation drives up agricultural prices

Enormous government stimulus and a busy printing press have revived fears of out of control inflation that plagued economists after the global financial crisis when unconventional monetary policies and huge fiscal stimulus were used so widely for the first time.

Advocates of low-inflation predictions cite the experience after 2008 when for many years inflation had to be pushed by extremely loose monetary policy.

This time, as the world is just recovering from an unprecedentedly sharp downturn in many economies, excessively slow, rather than rapid, consumer price growth again risks being a problem. The available inflation data is also on the dovish side at the central bank. Since February last year, annual inflation in the world’s largest economies has turned downwards, going into negative territory in the eurozone and China.

The weakness of consumer inflation in the past decade has not, however, prevented multiple increases in agricultural commodity prices in the first phase of the economic recovery.

The positive outlook for commodity markets is reinforced by a low base effect. In the first half of 2020, sugar and corn prices were at their lowest levels for many years. However, they started to rise steadily in May along with Wheat.

A similar triple reversal was observed in early 2009, together with the start of a rally in most markets. Over the next two years, through 2011, sugar prices tripled, while corn and wheat doubled.

Given that extreme monetary conditions are now supported by a much wider range of countries and that consumers are not skimping on food thanks to government support, the potential for commodity market price increases is even greater than it was a decade ago.

Short-term traders would do better to keep global trends in mind, given that trends in agricultural commodities are longer, often stretching over many months before major pullbacks. Sugar, for example, has shown nine months of back-to-back gains, while corn has seen a six-month rally that added more than 50% to its price.

The FxPro Analyst Team