2) Chicago Wheat
While surging oil and gas prices have the potential to create a severe recession, especially within the Eurozone, the impact of rising wheat prices as a result of the Ukraine war is arguably just as important.
Russia and Ukraine together account for a third of all global wheat exports; the commodity is so important to Ukraine thwat its national flag of yellow and blue signifies the sky over a field of wheat. The so-called ‘bread-basket of the world’ has essentially stopped exporting, causing Chicago Wheat to spike amid fears of possible famine in LEDCs.
While the warring countries have agreed a deal to allow Ukraine’s wheat out of blockaded Black Sea ports, there is no guarantee this will come to fruition. In addition, supplies have been hit by drought in Europe and North America, while second-largest exporter India has controversially banned most exports after record temperatures saw yields fall.
Accordingly, Chicago Wheat was at a stable $500 a bushel in mid-2020, before rising to a record near $1,300 a bushel in May 2022. But despite having fallen to around $800, demand for wheat is predicted to rise in the long term given its ease of growth, diverse use both as a key food source for humans and as animal feed, and its role in the production of meat, milk, and eggs.
There is a risk that high prices will see demand for alternatives, such as corn, rise. Of course, as food demand is inelastic, alternatives could easily rise to wheat’s high rather than cause it to fall.
An often-overlooked commodity, cotton prices hit their highest level in more than a decade in May, trading at over $150 per pound, a threefold increase from its $50 pandemic-era low. Cotton is an essential raw material in the manufacturer of multiple textiles, including many types of clothing.
Like wheat and oil, there is a significant imbalance between demand and available supply. To start with, the pandemic shut down much of the cotton industry. With demand returning, remaining operators are still gearing up manufacturing capacity.
More importantly, the US has banned cotton imports from Xinjiang province in China after widespread outcry over the possible use of forced Uyghur labour. The issue is particularly sensitive given America’s chequered history with cotton. Further, the ban is unlikely to be lifted, especially as relations between the two powers deteriorate.
In addition, climate change-induced heatwaves and drought have seen the yield of cotton crops in the US, which still remains the world’s largest exporter, fall significantly. In India, another important exporter, the same issues affecting wheat affect cotton; low rainfall, extreme heat, and increased agricultural pests.
While demand could be constrained by the global slowdown, the lack of alternatives and supply-side issues means cotton could continue to stay elevated.
4) Spot Gold
In this new world of rising inflation, gold remains the traditional real asset inflation hedge, preserving purchasing power and acting as a protective asset for investors, many of whom are coping with severe market stress for the first time.
With CPI inflation at 9.4% in the UK, 9.1% in the US, and a similar story across the developed world, the near record gold price offers an attractive place for investors to park money until market volatility subsides.
A Reuters poll of 35 analysts on 3 August says gold will average $1,745 an ounce in 2023, just shy of current prices, due to increasing interest rates and the strength of the US dollar. Already at $1,770, spot gold has fallen from a record $2,070 in March as investors choose between the safety of dollars over gold.
However, if the global slowdown accelerates into a full-blown recession, demand for gold will heighten as investors move money out of equities. This could translate into a recovery closer to its May high.
And with inflation potentially soaring higher, the hedge could become even more attractive.
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* Based on revenue excluding FX (published financial statements, June 2020).