The Rising Price of Tea Matters More Than You Think

As a geologist, my focus is on mining and exploration… The hard stuff… minerals.

But have you ever wondered about the other part of the commodity world?

Things like wheat, soybeans, cotton and even obscure things like orange juice or tea!

These are all tradeable materials that can offer unique opportunities.

And when we talk about tracking the ‘commodity cycle’, it pays to keep a close eye on the full spectrum of opportunities in this arena.

The Quiet Boom in Food Commodities

Gold’s stellar performance over the last 12 months is well known… Up over 40%. Yet some of the ‘softs’ have eclipsed gold over that period.

Take the humble coffee bean; it’s up more than 50% over the last 12 months! Same with sunflower oil. Before that it was cacao beans.

Food commodities don’t capture headlines like gold or silver, yet their price moves often eclipse metals at certain times in the commodity cycle.

But is it even possible to invest in them?

Trading in soft commodities is usually only in the realm of highly liquid ‘futures traders.’

But there are specific ETFs which mirror the performance of these futures markets, like the Teucrium Wheat Fund (NYSE: WEAT).

It’s a simple way to gain exposure if you think the price of wheat is going to surge. The same is true for many other specific commodity funds that track futures markets.

But why bother if You’re a Long Term Investor?

Just like you would with gold, buying soft commodities gives you exposure to tangible assets. An asset class that largely sits outside the financial system.

Thinking your diversified by investing in a mix of US, European and Aussie shares, in my mind isn’t real diversification.

Equity markets tend to correlate closely over boom and bust cycles. Whether your stocks are listed in Sydney, Toronto or Brussels, share markets tend to rise and fall together.

But they’ll always be a need for food commodities DESPITE what’s happening in the broader economy.

Just last week, the price of tea surged by almost 20%:

That was on a day when the S&P500 tumbled by over 2%.

Off course, we can’t make an assessment from a single day of trading, but historically speaking, commodities, have been an effective hedge.

There’s no better example than the 1970s.

As you can see, the average real ‘inflation-adjusted’ return for Aussie shares was negative from 1970 to 1979:

Imaging that; a decade of holding stocks only to see the performance decline in real terms!

But throughout that time, commodities and commodity stocks surged.

In 1973, OPEC enforced the infamous oil embargo against the US.

This was OPEC’s response to America’s support of Israel during the Yom Kippur War. Oil prices quadrupled from $2.90 to $11.65 a barrel!

That performance was closely followed by another important energy commodity:

Adjusted for inflation, the price of uranium shot past US$200 per pound by the late 1970s. A price record that stands today.

Today, uranium trades for just US$65 per pound.

And in terms of the ‘softs’ wheat prices exploded on the back of this inflation-led commodity cycle:

Tripling in price from the early 1970s to a peak in 1974 and remaining elevated throughout the decade.

Across the board, commodity assets surged in the 1970s:

And that’s precisely what we’d expect from a typical ‘commodity cycle.’

A period that delivers higher prices across the full spectrum of the commodity market.

From mining stocks, precious metals, industrial metals, energy AND food staples.

And as the 1970s blueprint shows, that can take place despite the general equity market being in decline.

So, is that what we can expect over the remainder of this decade?

As I’ve detailed in the past, gold typically leads (rises first) in these big commodity-wide cycle events.

And with gold prices surging to new all-time highs this year, you have a clear roadmap to what could be around the corner.

In my mind, the higher gold prices move from here, the bigger this commodity cycle could be.

To join me on that journey, you can do so here.

Until next time.

Regards,

James Cooper,
Editor, Mining: Phase One and Diggers and Drillers