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MitonOptimal Weekly Comment - Week 24, 2015Agriculture, unsurprisingly, has seasonal cycles which drive the supply of food. In addition, technological advances in farming methods have improved agricultural productivity to such an extent that world food production appears to have surpassed the world’s ability to consume it, causing an overall fall in basic food prices.

There have been bear markets in many agricultural markets (note BCOMAG Index chart – Fig:1) and the number of malnourished people in the world has almost halved in the last 10 years. (Asia & South America have improved significantly, whilst Africa has sadly deteriorated)

MitonOptimal Weekly Comment - Week 24, 2015 Fig 1


These falling food prices have also contributed to the benign inflation environment in which Quantitative Easing has been implemented since the ‘Great Financial Crisis’ (GFC). However, that benign food inflation era looks like it is about to change.

The oceans’ waves, currents and tides can sometimes cancel each other out and, on occasion, reinforce each other in an awesome show of power. All three major weather bureaus monitoring the Pacific Ocean have independently determined that the weather pattern known as El Nino has returned. A rising sea surface temperature triggers extreme counter cyclical variations in climate patterns, usually resulting in flooding in dry areas and drought in traditional rainy seasons.

This obviously plays havoc with agricultural production. It has also led the speculators, with record-large short positions, to start covering those shorts.

The combination of unusual weather and short covering will very likely trigger intermittent bouts of sharp upward moves in food prices. This food price volatility (combined with increasing energy prices) will ultimately globally influence CPIs negatively.

A glance at any broad commodity and equity index will tell you that equities are a lot closer to the top than the bottom and that commodities are a lot closer to the bottom than the top. Perhaps the seven fat years, since the GFC, are over and we are now in for the seven lean years?


“Agricultural prices are driven by the weather, energy prices by politics and metal prices by economics”

(Source: Sandra Gordon - Economist - SA)


The Seven Lean Years?





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