Anyone wanting a calm commodities market in 2021 would have been disappointed. It produced surprises that would have shocked even the most jaded market veterans.
Wheat, coffee, sugar, lumber, and energy prices all shot up. Perhaps most shocking was that the price jumps were driven by different factors. It wasn’t all upward: gold puzzled some investors, as prices slumped even while inflation surged.
The doubling in coffee prices this year might have been a shock to anyone who starts the day with a cup of joe. A blast of unfavorable weather hit Brazil and destroyed much of the crop. “It was a terrible drought, then a triple frost,” says Shawn Hackett, president of Hackett Financial Advisors. Prices for arabica beans started the year at around $1.25 a pound, reaching a high of about $2.50 in early December, a level not seen since 2011, according to data from Trading Economics. Recently coffee fetched $2.25.
Likewise, sugar rallied on the back of poor Brazilian growing conditions, sending prices from 15.8 cents a pound in early January to a high of more than 20 cents in mid-November, the highest level since early 2017.
“High demand for fuel ethanol and a big rebound in energy meant more of the sugar was fermented,” Hackett says.
Crude oil prices also saw megarallies as demand exceeded supply, says Sal Gilbertie, CEO of Teucrium Trading. The supply deficit is partially the result of increasing disillusionment with fossil fuels—by politicians and investors alike. “The producers are under pressure socially, from regulations, and economically,” he says. “They are being cautious about new exploration.” Brent crude surged to $87 a barrel from $51 in early January.
Likewise, European natural-gas prices jumped more than sevenfold to a recent record high of 180 euros ($205) a megawatt-hour from €20 in early January. Surging global demand from the resurgent world economy and cold-weather snaps met with political pressure to reduce the use of gas.
“No one has enough alternative-energy sources in place to stop using the hydrocarbons, and so you have a surge in demand and a price rise,” Gilbertie says.
Drought in key growing areas of Russia, Canada, and the U.S. took a toll on the spring wheat crop. Overall prices surged from $6.40 a bushel in early January to $8.56 recently. Separately, Russia imposed export taxes on wheat to help subdue local food prices, Hackett says. While the move kept grain inside Russia, it also sent global wheat prices up further.
Capping off the major rallies was lumber. It shot to an all-time high of more than $1,600 per thousand board feet. That was up from about $878 at the beginning of the year. The jump, which shocked the construction industry, came as increased demand for nonurban homes ran headlong into supply constraints, as lumber mills struggled to increase production in the face of labor shortages. “It was a bubble,” Hackett says.
Perhaps the most surprising commodities move in 2021 was the one that didn’t rally: Gold. The bullion price started the year at around $1,944 a troy ounce but retreated to $1,785 recently. That drop came despite surging consumer inflation, which jumped to an annualized 6.8% in November from 1.4% in January.
Gold prices reflect worries about future inflation and future changes in the cost of borrowing money, says Juan Carlos Artigas, head of research at the World Gold Council.
The two effects work against each other. Right now, interest rates are front and center with investors. However, that could change soon. “Investors are getting more worried that the inflation jump isn’t transitory,” Artigas says.