What happens when there is a weak dollar? It means our trading partners can buy more of our products, so it’ll improve our balance of trade. Sure, it leads to some measure of inflation because imports will be more expensive, but that will encourage us to buy more American products. What’s so bad about that?
Plenty. It’s been decades since Americans have had to deal with significant inflation, so maybe we should go back to the 1970s to see how we might first experience its effects.
Eating away at our budgets
When posting inflation figures, the Federal Reserve is careful to describe increases in the consumer price index as “core” inflation. Elements that are subject to what economists call “shocks” are set aside so decision-makers can focus on containing the costs of things that public policy can effectively address.
Those “non-core” goods are related to energy and food. It’s a dim memory now, but there used to be miles-long lines for gasoline, and your license plate number determined what days of the week you could even sit in that line. And while today we might grouse at the price of a pound of beef when we get to the supermarket’s butcher counter, it’s probably not much different from the price it was last week, last month or even last year.
Gas prices are at historic lows now as demand has been decimated due to the pandemic. With technological advances and the discovery of new oil reserves over the past 40 years, supply is no longer a problem. And even before the pandemic, demand was decreasing due to the accelerating adoption of alternative energy, increased fuel efficiency, and other changes in consumer behavior.
But why is food still considered too volatile to be included in core inflation? Because the whole concept of core and non-core inflation stems from the experience of the American consumer in the mid-1970s, as described by Northwestern University economist Robert J. Gordon. At the time, food prices were very much subject to shocks due to crop failures in 1973 and 1974.
Commodities Trader Joe’s?
“The raw ingredients for goods including chocolate and clothes have rebounded after their pandemic-fueled declines,” the Wall Street Journal recently reported, “lifted by supply constraints and investors’ bets that a recovering economy will boost consumer demand.”
Kirk Maltais’s article reports that “cocoa, coffee, and other soft commodities … now number among the world’s best-performing major assets,” rising more than 14% each in one month. Sugar was up 20%. It’s not helping that countries such as Brazil and India, which produce so much of the world’s supply of these commodities, tend to have the most persistent issues containing the coronavirus. As a result, there’s at least the perception that labor might not be available at harvest time.
Meanwhile, those of us in the post-industrial world are working from home more, meaning we’re buying our own coffee rather than drinking from the communal pot in the office break room. And we all seem to have taken up baking. As a result, demand is spiking.
“The gradual weakening of the U.S. dollar is another factor lifting soft commodities [prices],” the Journal article continues. “A weaker dollar makes it more affordable for importing nations to buy commodities priced in the U.S. currency. The dollar just posted its worst month in nearly a decade on the ICE Dollar Index, pushing traders to cut back on bets that soft-commodity prices will fall.”
There’s more bad news, though, especially for chocolate lovers. In January, shortly before most people had even heard of Covid-19, the African nations of Ghana and Ivory Coast formed a chocolate cartel. Considering that, between them, they control 60% of the world’s 4.8 million metric ton-per-year supply of cocoa beans, this new syndicate could turn out to be a force to be reckoned with.
So, does this mean that Dunkin’ Donuts is going to roll out a layaway plan? Is Starbucks going to buy out Amazon? No and no.
But it does mean that we might start using substitute goods – tea instead of coffee, artificial sweeteners instead of sugar. And we might even adjust our thinking to spending more of our monthly budget on food and less of it on entertainment. Grocery shopping and cooking together could become a more formalized part of our social lives. (“Publix and chill”?)
And while coffee, sugar, and chocolate are the tastiest soft commodities to be spiking right now, they’re not the only ones. Cotton and lumber are also enjoying a surge. Rather than getting mad, you could be getting even, or perhaps coming out ahead. It would require, though, a tactical, well-planned approach to soft and hard commodity investing as part of your overall investment strategy. It’s better to bring someone with the right financial expertise into the conversation. Otherwise, you might be relying on just one opinion. And a year from now that opinion, plus $20, might get you a cup of coffee.