Best 3 commodities to watch in Q2

Commodities trading saw a rush of interest in 2022. As the western world slowly crept out of seemingly endless pandemic lockdowns, huge demand came up against reduced supply as many producers struggled to gear up operations.

Russia’s invasion of Ukraine — almost exactly a year ago — saw supply squeezed even further, as a combination of two-way sanctions and wartime logistical problems found oil, gas, wheat, gold, palladium, nickel, and steel hit record or near-record highs.

However, most commodities have now come off these highs. Most significantly, the days of ultraloose monetary policy are over. The US dollar — the world’s reserve currency — is subject to the federal funds rate, now between 4.5% and 4.75%, and Chair Jerome Powell has indicated that tightening will continue for the foreseeable.

The trajectory of oil and gas seems unpredictable, as analysts weigh the competing influences of a potential global recession, Chinese reopening, and continued Russian sanctions. But gold, copper, and orange juice could more reliably all rise in value over the next quarter, as all three have specific factors driving demand and constricting supply.

Best commodities for Q2

Gold

For thousands of years, Gold has been recognised as the ‘safe haven’ real asset inflationary hedge during times of severe economic stress, and 2023 is no exception.

For context, 2022 saw central banks buy 1,136 tonnes of gold worth $70 billion, according to the World Gold Council, by far the most since records began in 1950. This marks a huge shift in prior policy which saw central banks sell hundreds of tonnes a year during the 1990s and 2000s.

The appeal is obvious; though gold doesn’t deliver a ‘return,’ it does not rely on any one issuer or government and enables central banks to diversify away from other traditionally safe assets such as the US Dollar or US treasuries.

Of course, gold prices and the US Dollar are inextricably intertwined — the expectation of further rate rises depresses the gold price as the currency becomes a safer haven than the precious metal. But as the peak rate approaches, gold could see a new record high, having dropped since January.

It’s worth noting that during the 2008 financial crisis, the S&P 500, widely touted as the benchmark for the US economy, fell by 37% while gold rose by 24%. However, at the time, the Reserve was enlarging its balance sheet through quantitative easing, increasing the supply of US Dollars, driving up gold’s relative value.

Given the lessons from the Volcker years, rates will only start falling when CPI inflation returns to within the target range, perhaps during 2024. Of course, gold bull runs typically start some months before the pivot begins, making timing the trade complex.

Copper

21 million metric tons of Copper are mined every single year. But this is not going to be enough to meet the growing demand. The ductile material is essentially irreplaceable in electrical products, including within EVs, phones, wind turbines, and solar panels.

Over the next two decades, the International Energy Agency expects copper to become a dominant mineral alongside graphite and nickel, with demand expected to triple by 2040. Codelco,
the world’s largest copper producer, concurs, arguing that there could be an eight-million tonne shortage by 2032.

Similar figures are cited by S&P Global which sees a deficit of 10 million tons by 2035, and Bloomberg Intelligence, which sees the shortage gap growing to 14 million tons by 2040.

For context, 2021’s shortage gap came to just 2% of global production but saw copper prices rise by 25%. The 2030s gap is predicted by multiple major analysts to be at least ten times as much.

Of course, this deficit is likely to drive copper prices higher over the longer term. The problem is that inflation has driven production costs up by as much as 30%, and legacy producers in South America are seeing even higher costs of production as their mines age and new projects become harder to explore.

Importantly, the cyclical nature of commodities means that copper’s price could fall in 2023 in accordance with the rising recession. This means operators could struggle to convince investors to spend on new mines, which take up to a decade to come online, rather than spend more on dividends and buybacks.

Orange Juice

It’s becoming more expensive than ever to put a full English breakfast on the table; wheat, lean hogs, eggs, and tomatoes are all seeing serious price rises as higher commodity values feed into food costs.

Likewise, Orange Juice has almost doubled in price compared to this time last year, making the once common breakfast drink something of a luxury in many households — a problem for many governments which rely on cheap OJ to get Vitamin C into the general population. This rise has been driven by several factors, but the key issue is falling production in the US state of Florida.

The US agriculture department predicts that the state will see production fall by 61% in this season to just 16 million 90lb boxes of oranges. While Brazil — the world’s largest orange juice exporter – has stepped up to fill the export gap, this has come with price increases.

University of Florida research shows that the citrus industry brings in about $6.6 billion per year but was dealt significant damage by Hurricane Ian in September, with this one weather event dealing $247 million in damages alone. Despite government grants, poor weather continues to plague Floridian production.

In addition, the state continues to suffer from the citrus greening pandemic, where insects infect orange trees with bacteria that causes them to produce unsellable fruit, and eventually die.

This is a huge, growing problem — especially when considering that while Brazil and Mexico make up most of the market, Florida accounts for most of the premium not-from-concentrate market, and therefore its production disproportionately weighs on orange juice’s price.

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* Based on revenue excluding FX (published financial statements, October 2022).