Many commodities from copper to lumber have dropped from their peak pandemic prices, easing the most acute worries about an inflationary spiral. But investors remain bullish on many of them, arguing they still look cheap.
Copper is down 10% from a record it hit in March. Front-month futures for corn and soybeans are off their May highs by 13% and 19%, respectively. Hogs have lost 17% this month.
Federal Reserve Chairman Jerome Powell recently said lumber’s dramatic arc showed how the sky-high materials costs that characterized the reopening economy were the result of supply bottlenecks and other factors that aren’t expected to last as the world’s economies move further from lockdown. Lumber futures have fallen 54% after shooting up to more than four times the average price during the most recent springs before the pandemic.
"A few months ago the consensus was that prices for commodities can’t go anywhere but up," said Richard Dunbar, head of multiasset research at Aberdeen Standard Investments. "More recently, though, we’ve had a few reminders that prices don’t go up in a straight line."
Despite the recent drop, lumber remains twice the typical price for this time of year. Copper, row crops and swine are still around their highest prices in years. Oil and natural gas, laggards of the reopening, have risen sharply to their highest levels since 2018.
Commodity prices have presented conflicting signals to investors. On one hand, rising prices are seen as a threat to the recovery because they contribute to higher costs for goods. On the other, investors tend to pile into commodities to benefit from rapid growth and protect the rest of their portfolios against inflation.
Futures performanceSource: FactSetNote: Continuous contracts
Two-month returnTwo-year returnLumberCopperNatural GasSoybeansOilCorn-60%-40-20020406080
Investors in the coming week will monitor the June jobs report for the latest gauge of the economic recovery. Earnings from food company General Mills, Inc. , alcoholic beverage seller Constellation Brands, Inc. , and home-goods retailer Bed Bath & Beyond Inc. will offer a look at consumer spending habits and how companies are managing higher material costs.
ConocoPhillips scheduled a call with investors that could offer insight into how U.S. energy producers are reacting to rising prices. Meanwhile, the Organization of the Petroleum Exporting Countries and its oil-market allies, such as Russia, meet Thursday to consider boosting output.
"I think we’re in the early innings of this," said Ed Egilinsky, head of alternative investments at Direxion, which manages exchange-traded funds that wager on commodity futures prices. "I don’t believe it’s as transitory as the Fed is saying."
Flush consumers, government spending such as China’s post-pandemic restocking and the trillion-dollar infrastructure bill being negotiated in Washington, and years of underinvestment in capacity are reasons some investors are bullish on commodities. Others see those factors as a signal that they might be a source of bargains.
Commodities tend to perform well relative to other asset classes during periods of inflation and are historically cheap compared with stocks, according to researchers at Deutsche Bank. Major stock indexes have soared to records over the past decade thanks to the outsize influence of technology companies that have become the world’s most valuable firms.
"Commodities as an asset class have been out of vogue for over 10 years," said Jim Reid, Deutsche’s research strategist. "Just a small rotation back in favor could have a large impact on prices."
Matt Fine, portfolio manager at Third Avenue Management LLC, has loaded the firm’s $663-million value fund with shares of copper miners and firms that provide services and equipment for offshore drilling, such as supply-vessel owner Tidewater Inc. and PGS ASA, which sells seismic data for ocean-bottom exploring.
Offshore drilling declined sharply during the yearslong price war between OPEC and U.S. shale producers, leaving few services companies solvent and in position to profit should there be a revival in activity at higher oil prices.
"I’m not bullish on commodities, per se — except copper," Mr. Fine said. "I’m bullish on substantially mispriced securities and the natural-resources space continues to be a place where we can be opportunistic and can still find profoundly mispriced securities."
One of his fund’s biggest holdings is Interfor Corp. , a Canadian sawmill operator that has earned record profit since last summer cutting the U.S. South’s historically cheap pine logs into high-price lumber. Interfor shares are up 174% over the past year, compared with a 39% rise in the S&P 500. This week, Interfor will distribute some of its lumber-boom windfall with a special dividend of $1.65 a share.
Lumber’s tumble isn’t all that bad for Interfor and its rivals, Mr. Fine said. They can still rake in profits selling lumber at prices north of the pre-pandemic record with less risk that exorbitant wood costs doom the housing boom and dry up demand for two-by-fours.
Analysts are cranking out ideas for investors to capitalize on high commodity prices.
BofA Securities suggests the Toronto Stock Exchange index. Drillers, miners, sawyers and others in the commodities business make up more than a quarter of the Canadian stock basket, compared with less than 6% of the S&P 500, and the Toronto index has traded at a steep discount to U.S. shares over the course of the current tech-stock boom.
Goldman Sachs on Friday recommended shares of five big companies along the natural-gas supply chain, including producer EQT Corp. pipeline operator Targa Resources Corp. and liquefied natural gas exporter Cheniere Energy Inc.
U.S. natural gas futures have gained one-third since March to become more than twice as expensive as a year ago, and European gas prices have shot to multiyear highs as stockpiles around the world are burned up faster than new supplies are hitting the market.
China, buyer of some 60% of the world’s resources, is a risk to these bullish bets. Demand from China has helped drive soybeans, corn, natural gas, coal, copper and zinc to recent highs, but lately the country has taken steps to tame prices.
Those include efforts to curb speculation at home, and earlier this month, Beijing said it would release copper, zinc and aluminum from its stockpiles to cool prices. The move helped knock copper prices from record levels and analysts say that there is reason to believe that China will make similar moves to keep costs in check.
"Supply can sometimes come onstream from unexpected places" said Aberdeen’s Mr. Dunbar. "People thought it would take up to five years to see much new supply but it turned out it took five minutes."