The True Price Of Commodities. Is The Market Really Causing Inflation?

Today's?article takes a close look at the commodity market and what you read might surprise you.

Inflation- It’s big and it’s bad, but we are only being told some of the facts.

Once again yesterday, we’ve heard inflation inflation inflation from another central bank as the ECB raised rates 75 basis points to combat the rise in prices.?

Prices are high, and we are suffering. But how closely does everyone monitor the ‘LIVE’ prices of what is affecting us most? Commodities hit crazy levels after Russia invaded Ukraine and it feels like prices at the source are still rising;?but they aren’t.

The cost of food, materials, oil/petrol and gas are at the forefront of the fight against inflation. CPI is ever increasing, so therefore the wholesale prices must still be going up???

Let’s have a look at todays prices compared to what they were on the 23rd?February, the day before the invasion when inflation was seemingly under control. You’ll very quickly notice a common theme:?pretty much everything is back where it was.

Oil

Oil had a huge amount of press after the invasion. How would we all cope without Russian oil. Brent went through $120 a barrel.?

Brent crude is one of the most traded of all of the oil benchmarks, and is defined as?crude mostly drilled from the North Sea oilfields: Brent, Forties, Oseberg and Ekofisk. This oil type is widely used as it is both sweet and light, making it easy to refine into diesel fuel and gasoline.

Interesting. This?is where we get a majority of our diesel. We saw two major spikes since the invasion: one directly after, and one in mid-June. Since then Brent Crude oil has gradually declined and is now trading below where it was before the invasion.

Wheat

Wheat is one of the most necessary and needed food ingredient. It is the second most produced grain in the world after corn. We use it for bread, pasta and many other food staples.

In 2019, Russia and Ukraine together exported more than a quarter (25.4 percent) of the world’s wheat, according to the Observatory of Economic Complexity.

With the resumption of exports through Black Sea ports, Ukraine expects to sell over 20 million tonnes of grain reported to have accumulated in port silos since its invasion started on February 24, while aiming to clear stockpile space for the coming harvest.

?Here we see a very similar story to oil. A steep rally after the invasion, another bout of fear and panic around June, then a gradual decline to levels below the invasion. Now that wheat is leaving Ukraine again, the price seems stable around $8 and $9 a bushel.

Cheese

Why not, who doesn’t love cheese and it’s in most of our baskets at the supermarket. Let’s see what the price of cheese has done since the invasion.

?This seems to be one of the clearest charts showing how the invasion has affected us and the price of goods. The price went up, and now it has come back down again. Looks pretty simple and clearcut.?

Sunflower oil

After the invasion there was huge panic about sunflower oil. This is one of the most widely used oils and?Ukraine is the largest sunflower oil producer in the world?with 4,400,324 tonnes production per year.?

Russian Federation comes second with 4,063,080 tonnes yearly production. Ukraine and Russian Federation produce together more than 50 % of world's total sunflower oil.

?Ukraine and Russia provide 50% of the world’s sunflower oil, yet now the price is back/below where it was. I’m not even sure how this is possible but it can’t be a bad thing.

UK electricity

Now herein lies the problem.?

This has been in the news all day, for many many days. It is exactly the thing that needs to be tackled. This graph is the only one that doesn’t show a return to normality.

?Our conclusion

We are being told that inflation is driving up the price of everything. That commodity prices are at extreme levels.?

Well, this simply isn’t true. The only problem left is just one commodity, and that’s gas. We need to find a substitute for Russian gas. Everything else has been brought under control.

The media always only tells us part of the story and it’s usually the part that they find the most ‘dramatic’ and therefore sellable.

For the last few days we’ve been hearing how the pound is the weakest it’s been since 1985.??But against the Yen it’s actually at the highest it’s been since 2016.?

Against the Euro it’s trading around the middle of its range since 2008.?

It is only against the dollar that the pound is particularly weak,?but no paper seems to mention that. It’s not so much the weak pound, but the strong dollar. The dollar index (dollar against the world) is the highest it has been since 2002. The yen is also the weakest it has been in 30 years against the dollar – we aren’t alone, we haven’t done anything wrong so let’s stop making out that this is somehow the governments fault and heads should roll.

If the journalists told us the whole story, everything would be less sensational, less dramatic. This would almost certainly cause fewer problems.?

The recession will only happen, if we keep being told the recession is about to happen. People will stop spending if you tell them they have no money! Sentiment is at an all time low; lower even than when we thought there was a chance Coronavirus might kill us off, or worse, lock us all in our homes! How is that possible. The only problem we currently have is that electricity is too expensive. How spoiled do we sound?

Production costs are increasing due to the gas price. Electricity is costing everyone more, and these prices will be passed on in what we buy. The problem isn’t the price of wheat, rice, oil, cheese potatoes etc. it’s the price of keeping the lights on at the supermarket or the ovens at the bakery and that is now the sole contributor to inflation.

It is this that the Prime Minister is hoping to tackle, and that is hopefully what will bring inflation under control over the next 12 months. She has done the right thing. I don’t know if I’m a fan of Liz Truss yet, but yesterday?she made an effort to tackle the ONLY problem we really have. If the trading prices of all these things are coming down, then so too will the prices at the till, eventually.

We just need more gas.

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For more information, please contact us?here. As gas prices fall, we expect markets will rise, and our trading teams will hopefully be well positioned to take advantage.