7.9 C
Tuesday, February 27, 2024
HomeFood Inflation Update: Lull Before China's Storm?

Food Inflation Update: Lull Before China’s Storm?


Related stories

Exxon Has Entered The Chat: US Supermajor Threatens To Derail Chevron’s $53 Billion Hess Merger

Exxon Has Entered The Chat: US Supermajor Threatens To Derail Chevron's $53 Billion Hess Merger Exxon has entered the chat... That was the gist of the message Chevron gave to the world earlier this week after warning that its proposed $53...

Yields Slide After Solid 7Y Auction, First Stop Through Since October

Yields Slide After Solid 7Y Auction, First Stop Through Since October After two lousy, record large coupon auctions in Monday's two-for-one special, moments ago the Treasury issued a non-record $42BN in 7 Year paper (we saw far bigger 7Y a...

Kremlin Warns of Escalation if NATO Troops Fight in Ukraine

The Kremlin has warned Kyiv's European allies that sending troops to fight in Ukraine would lead to the "inevitability" of war between Russia and NATO after France said that, despite a current lack of consensus, "nothing," including sending Western for...

Biden’s Half-Hearted Border-Control Pitch

Biden's Half-Hearted Border-Control Pitch Authored by Christopher Roach via American Greatness, There are rumors - likely trial balloons - that Joe Biden is about to get serious about controlling the border. Along with inflation and our c...

Most UN Security Council Members Demand Taliban Rescind Decrees Seriously Oppressing Women and Girls

Russia, China, Mozambique, and Algeria didn't sign on to the statement.
Food Inflation Update: Lull Before China's Storm?

By Russell Clark of the Capital Flows and Asset Markets Substack,

As I and many of my subscribers have noticed, many of the key commodity drivers of inflation have seeming rolled over.

European gas prices, Chinese pork prices, oil prices, US corn prices among others have weakened to levels seen before Russia’s invasion of Ukraine. Strangely, weak commodity prices should be disastrous for my key trade, long GLD short TLT, and yet strangely it has breached new cycle highs. Why is this?

The first thing that should be said is that commodity investing is hard. Surprises in short term demand and supply can drive huge moves in spot markets. A good example is pork prices. Pork is particularly big driver of Chinese inflation. Chinese and US pork prices have recently fallen significantly.

I have no idea why pork prices have fallen. The reopening of China would have made me think short term demand for pork would be higher, and hence prices would be rising. That they are falling, suggests maybe supply is robust. Confusing the picture is that Chinese corn price have not weakened, meaning that profitability for pig farmers has collapsed. All a bit confusing to be honest.

However, my core argument is that China has turned into a net food importer, and this should be putting upward pressure on food prices, as long as China does not devalue. The data on China being a net food importer remains compelling. European exports of meat to China remain strong.

Chinese pork prices can be greatly effected by swings in supply. However during the African Swine Flu crisis, beef consumption in China grew significantly.

China grows very little beef (very little pasture land).

Robust pricing for beef would point to food inflation in China still having an upward bias in my mind.

The key argument of China becoming a food importer seems intact.

The other end of inflation argument you could make is that energy price inflation is done. European gas prices have collapsed in recent months. In part driven by a very warm winter.

Even more so than Chinese pork prices, natural gas prices are very susceptible to short term fluctuations in demand and supply. To get around this I look at 5 year forward futures on US natural gas. The long dated futures have yet to show an inflection in pricing to indicate we are going back to a sustained bear market.

What I think is happening is that in early 2022, the US seemed very determined to counter inflation through what ever measure were necessary. We saw the sharpest increase in short term rates in a generation. And we also saw the biggest sell down of the strategic petroleum reserve. This sell down added about 600k barrels a day of supply to oil markets.

As argued previously, food inflation forces wage inflation. And China becoming a food importer is creating food inflation globally.

This means that central banks have to run aggressive interest rate policy, or inflation will return.

GLD/TLT reflects that. When TLT is weak, which happens when the market pricing in aggressive interest rate policy, GLD is also weak. But as soon as TLT reflects a slackening of central bank resolve, GLD shoots higher. My best guess we are a short term lull in inflation, making short TLT and other bond trades look attractive here.

Tyler Durden Mon, 01/23/2023 - 22:00


- Never miss a story with notifications

- Gain full access to our premium content

- Browse free from up to 5 devices at once

Latest stories


Please enter your comment!
Please enter your name here