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Commodity Analysis
There is a saying “don’t fight the Fed”, but in the broader global economy, the Fed is just one central bank, with regulatory powers and interest rate price-setting powers. The saying should be “don’t fight the Fiscal” because when a country decides to use its economic power, there is nothing we can do as traders other than hold onto their coattails and go for the ride.
In 2019 the two largest economies were the USA and China, and the assumption is they still are in 2021. During the Trump administration, there was a lot of back and forth between these two economic behemoths, with the ‘Trade Wars’, the trade deals, and tariffs. Then we had the coronavirus pandemic and global economics took centre stage.
In the run-up to the 2021 inauguration of President Biden, not a lot was being mentioned around the Chinese policy towards food security. But the facts are, China needs to feed 1.4 billion people and after a culmination of African Swine fever, Coronavirus, and natural disasters including Typhoons and massive flooding, the need to feed their people has focused the authorities.
President Xi Jinping has said that the “rice bowl of China must be firmly kept in Chinese hands”, meaning China must ensure absolute safety in the supply of grains. As the pandemic stopped the supply chains dead in their tracks, there was also a lack of ability or maybe the willingness to export critical goods like Wheat. In the UK for a few weeks, there was a shortage of flour, as everyone locked into their houses not only took to artisan breadmaking but because many countries, including Russia, Ukraine, and Vietnam, imposed strong restrictions on food exports.
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China has benefitted from the depreciation of the US dollar and is using its currency’s appreciation against the greenback, to stockpile copper and grains. China currently accounts for approximately half of the global metal demand and is breaking records with its imports of grains.
China has been stockpiling for decades now after they decided to establish a national grain stockpile in 1990 and as we all learned during the Trump administration, they buy a lot of soybeans from the US to the benefit of the US farmer. In fact, China consistently imports over 100 million tonnes of food since 2014 but in 2020 they increased their imports by 28.5% year on year. Following the signing of the US-Sino phase one trade deal in January 2020, China committed to buying an additional $32 billions of US agricultural goods in 2020 and 2021.
Inflation
A weaker US dollar, supply chain disruptions, pent-up demand, and a transfer of spending powers from say the annual holiday to a new car, or from the move out of a city into the countryside plus China’s actions are major concerns for inflation watchers.
Warren Buffet said at the annual shareholder meeting on Saturday that “we are seeing very substantial inflation”, “it’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.” The Oracle of Omaha would put the current Fed and US Treasury monetary policy of increasing fiscal debt and low-interest rates as a key reason for the weakening dollar which is also contributing to the global inflationary pressure, as base metals and grains are commonly priced in the US dollars.
China stockpiling their commodities plus their fiscal expansionary policies, means they are exporting inflation, as they rebuild their economy and their pork supply/livestock. For Warren Buffet to say that the prices are being accepted, the question is for how long? If the increased prices of Lumber and Steel are adding $35k more to new build houses, but US job security is not guaranteed or wage inflation is behind the commodity inflation curve, how long can these prices be accepted for?
For the low to middle-income families, the price of fuel and food is going to be the biggest concern, and a slip towards increased child poverty would force the US government to continue with their helicopter money to fill the gap left by the large unemployment and non-existent wage inflation, post the COVID-19 pandemic.
The ActivTrader sentiment indicator for the Wheat July 21 contract shows that 90% of traders are long Wheat into the summer of 2021, which is understandable considering everything mentioned above.
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The weekly chart for the Wheat contract shows that there is a distinct uptrend from as far back as June 2020, with a significant bottom created in the summer of 2016. The rising US dollar into the beginning of 2017 accounts for the bottoming pattern in Wheat as does the pandemic low and move into the US dollar as a safe haven in 2020.
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If the US dollar were able to find a supporting base around the $91 level, and then appreciate back towards the $100, the cost of Wheat, etc. would in due course come back down. But the consensus is that the US loose monetary policy, trade deficit, and increasing fiscal deficit will continue to weaken the US dollar.
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On the H4 Wheat chart, I am looking for a pullback to the breakout level of 680.00 as marked by the Blue Arrow, or for a break higher than the dashed sloping trend line to see if there is a break-retrace and continuation trade to the upside.
To the downside there are quite a few pockets of balance, so without an extremely bearish catalyst, for example, a US dollar continuation to the upside, then I am assuming for now that any dip is bought up on the Wheat chart.
