In these darkening days of early winter, Nouriel Roubini is making things seem a lot darker.
He was on Bloomberg TV this morning, talking once more about the spectre of deflation, which he’s been calling for for years. As readers of our newspaper may have noticed, I am writing a series on the question of the long term commodities bull market theory and whether it is still sound. His comments on TV and in his newsletter today put him on the side of the ” commodity bull market is dead” thinkers, although his view on agricultural commodities are brighter.
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Prices had been softening for most of the previous month, but heading into the Labour Day long weekend, the price drops were startling.
“Stagdeflation is a situation in which you have economic stagnation and recession and deflation,” said Roubini (on Bloomberg), who was calling for a financial and economic crisis like this year’s situation for the past few years.
“Demand is falling relative to supply. The pricing power of firms is reduced. You have to cut prices to sell. Then you have slack labour markets with unemployment surging. That puts a lid on wage costs and labour costs. And now you also have a slack in commodity prices, from the peak in early July to early fall was 30 percent. In my scenario you have a severe recession globally, you’re going to fall 20 to 30 percent (further).”
Deflation isn’t a nice prospect for farmers, who can slot themselves into the role of the firms Roubini mentions above that see their pricing power reduced. That means returning to the position of being price-takers, something farmers are used to but had enjoyed being freed from for most of the past year and a half.
But while Roubini generally sees economic catastrophe for most of the world’s economies and commodities, his view on agricultural commodities is brighter, although that means instead of being jet black it’s more a medium shade of gray.
Here’s what he wrote in his email newsletter, RGE Monitor, today:
“Despite the steep price declines so far, commodities as a group have only fallen halfway to their 2001-02 trough, meaning they have further to fall . . . Agricultural commodities took smaller hits as their price climbs were not as excessive. Their peak prices this year remained two to three times below their inflation-adjusted highs in the 1970s.”
Roubini thinks ag commodities might fare better and be relatively faring better than other commodities, but still have rough seas ahead.
“Agricultural commodities have outperformed metals and oil, although that just means their prices dropped the least. Agriculturals are the commodity sub-sector least sensitive to the economic cycle, but have nonetheless suffered from the deleveraging which has seen investors move into cash . . . While metals and energy prices struck both nominal and real all time high prices, agricultural prices just rose above the historical lows of the 1980s, remaining far below the inflation-adjusted highs of the 1970s. Fundamental drivers such as biofuel production, population growth and the rising income and protein demand of developing countries, argue for a secular bull market.
“In the medium term, though, the exit of speculators and the supply overhang from production growth may bring downward pressure – especially in grains. As the global economy recovers, agricultural prices should speed their uptrend, tempered by the fact that agricultural commodities are renewable resources unlike metals and fossil fuels.”
So I don’t know if that’s good news or bad news on balance, but it isn’t terrible news when one of the biggest bears in the world thinks the outlook for ag commodities isn’t that bad.
