In the last few weeks, we have seen a sharp rise in the price of some commodities, such as natural gas (and a little bit of all energy industry) and cotton. Many people are wondering which commodity could be the one to make the next rally. Let me start by saying that two hot topics will influence the near future of commodities: Evergrande and inflation.
Evergrande, one of the largest real estate groups in China, is scaring the market with a liability close to $300 billion. I doubt that the company will be able to meet its financial commitments, however, because the Chinese government tries to control everything, what we see from the outside might be very different from what is going on inside the company.
If the company’s meltdown really happens, considering that the real estate market and services related represent 29% of the Chinese GDP, one can expect that it will spread to the other sectors of the economy, and especially, to the commodities (let's not forget that China is the leading importer of raw materials). Therefore, this can be a tail event strong enough to shake commodities prices. We must always remember Lehman Brothers in the 2008 financial crisis.
Inflation in the US, beyond the Fed's forecasts and reassurances, is rising and will rise again in 2022. This is certainly a positive factor for commodities, which have always been anti-inflationary. This could lead more and more investors to get out of the stock market and buy commodities.
I come to the question of the title, what will be the next commodity to make a strong bullish move? I am convinced that it could be sugar. Let me explain why.
The drought, frost and fires that hit part of the sugarcane fields in the Centre-South will reduce the availability of sugar in Brazil this and next crop. To compensate for this deficit, India is being looked to. Yes, but there is a problem in India.
Local sugar prices are higher than global prices and this is holding back exports. Mills are not signing export contracts, as they are getting far higher prices in the local market.
After India shipping out a record 7.5 million tonnes of sugar in the current season, mills have so far signed contracts to export 1.2 million tonnes in the 2021/2022 marketing year that starts from 1 October. Moreover, The bulk of those deals were signed in August, but a surge in domestic prices has since cut new contracts almost to zero.
Local prices have increased by 13% in the last two months, the highest change since November 2017.
Uttar Pradesh is India's biggest sugar producing state and it is due to announce its advised price for sugar cane, the price mills must pay to growers, in the next few weeks. With elections looming, it is likely to be further elevated.
In coming months global prices would rise on lower exports from India, while local prices will correct with new season supplies.
How much will global prices increase? Global raw sugar prices need to rise above 21 cents per lb to make exports viable from India. Personally (but this is my opinion), I think global prices will reach the 24 cents area per lb.
In the last few weeks, we have seen a sharp rise in the price of some commodities, such as natural gas and cotton. Which commodity could be the one to make the next rally? Let me start by saying that there are