Introduction
Welcome to July, a month brimming with implications for various commodities. Today, we delve into the current state of commodities and their relationship with global politics.
Fiscal Policy and Debt
The U.S. project of law, which supports President Donald Trump’s comprehensive policy, has been voted on. This opens the door to a long-term potential increase in U.S. public debt, according to Budget Office data.
The Trump administration does not share the overall assessment and asserts that revenues from tariffs and economic growth, driven by administrative simplification and deregulation, offset certain revenue shortfalls.
Investor Behavior and Global Context
Investors are becoming “stateless” in their pursuit of returns. Europe, for instance, is looking attractive due to heavy spending on arms and infrastructure, a weakened dollar, and significant capital outflows.
Typically, the relationship between the dollar and commodities is inversely proportional. However, when they don’t follow this pattern, as is the case now, dollar-denominated commodities weaken along with the dollar.
Geopolitical Landscape
The geopolitical agenda remains unstable, and global trade is yet to be defined. The two major powers are now competitors rather than complementary, forcing other nations to choose sides in this disguised commercial geopolitical war.
The U.S. political system is more volatile than China’s, and the Republicans’ future depends on the outcome of next year’s midterm elections.
Commodity Market Overview
We introduce the world of commodities, starting with oil. Oil prices have eased due to the Strait of Hormuz not being a concern and OPEC+ countries attempting to increase crude supply, which the White House supports as it seeks reduced energy costs (a proxy for low inflation).
This aligns with the recent rally, where U.S. shale oil industry secured hedges to execute at better prices, a concern when oil was heading towards $50.
For agricultural commodities, Russia’s removal of export taxes on wheat signals the need for more trade amidst competitive markets.
Argentina concluded a highly efficient soybean cycle, producing over 50 million tonnes, while Brazil is experiencing record-breaking results.
China recently purchased U.S. soybean flour, a test case potentially reducing U.S. dependence. This is significant given China’s excess grinding capacity and preference for importing soybeans.
U.S. summer crops are thriving, with ideal weather in key states. Prices are starting to factor in potential declines, mirroring last year’s trend.
However, Mexico may face a challenging agricultural season with low yields and cheap prices. In contrast, severe droughts in our country have reduced productivity, exacerbated by low international prices.
Currently, buyers are tasked with catching a falling knife, assuming favorable weather in the U.S. Midwest continues for at least ten days, crucial for corn pollination.
Key Questions and Answers
- Q: How does the recent fiscal policy impact commodities? A: The U.S. project of law supports President Trump’s comprehensive policy, potentially increasing long-term public debt.
- Q: What is the current state of global investor behavior? A: Investors are becoming “stateless,” seeking returns globally, with Europe appearing attractive due to heavy spending on arms and infrastructure.
- Q: How are commodities performing in the current geopolitical climate? A: Oil prices have eased, and agricultural commodities like wheat see Russia removing export taxes, signaling the need for more trade.
- Q: What are the prospects for U.S. summer crops? A: U.S. summer crops are thriving, with ideal weather in key states, though prices are starting to factor in potential declines.
- Q: What does China’s recent soybean flour purchase indicate? A: It’s a test case potentially reducing U.S. dependence, given China’s excess grinding capacity and preference for importing soybeans.
