Inflation is Beginning to Loosen its Grip

The Fed rate hike cycle will soon end, but commodity market supplies remain vulnerable.

The war in Ukraine and inflation will remain the two biggest factors for commodity markets in the first half of 2023. There are now consistent signals that inflation is softening, which should enable the Federal Reserve to comfortably relent on interest rate hikes before mid-year. However, the opening of the Chinese economy could complicate the inflation picture as increased demand for oil and gas in China threatens to upset the delicate global energy supply and demand balance.

In Ukraine, all signs still point to a long, entrenched war that will continue for months to come. The uncertainty of grain supply from Ukraine will persist as U.S. growers prepare to plant another large crop, aiming to rebuild domestic supplies of corn and soybeans. Fertilizer supplies remain relatively tight but prices have declined, which should generate good demand for ag retailers in early spring.

In animal agriculture, some supplies are beginning to grow. But broadly, production growth has been sluggish and prices remain relatively high. The egg sector is battling back from severe bird flu to replenish retail supplies, and milk production is on the rise.

California agriculture is getting too much of a good thing as multiple storms have battered the state. Water storage will improve, especially after the snowmelt, but flooding damage will be significant. A warm winter in Europe has softened global natural gas prices, though U.S. heating and electricity prices have increased substantially. And the broadband market continues to evolve as cable operators seize on solutions to utilize existing infrastructure to compete with fiber.

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