Expert Commentary

Beans in the teens? Stagflation versus Deflation.

Soybean prices are on a rip higher. Is it a sign of price inflation?

“Soybean prices hit four-year high as nerves rise over food inflation,” was a headline in the Financial Times today. Futures prices are zooming towards $11 per bushel, up from $8.50 in July. It might not be long before commodity traders start talking about “beans in the teens” again. That phrase first made an appearance in 1973, when soybean futures were approaching $13 per bushel, marking a high point which lasted for decades. The 1970s witnessed wild swings in food and consumer prices and so, when agricultural commodities are advancing, many people start fretting about a return to that decade.

That was a period of stagflation – rising consumer prices in conjunction with sluggish or declining economic growth. Is that we are in for now? Perhaps, but it’s worthwhile noting that soybean prices actually spent some time “in the teens,” briefly in 2008 and then from 2011 to 2014. Consumer price inflation during that time was subdued and so we need to examine a broad measurement of commodity prices to get a handle on potential price inflation.

The chart below shows the Commodities Research Bureau (CRB) index with an Elliott wave count suggesting that the decline from 2008 is not over just yet. One of the aspects that makes the bear count quite compelling is that the index stopped its advance at a very significant level. The 0.618 retracement of the December 2019 to April 2020 decline was 154.73. The September high in the CRB index was 154.50! Turning lower from pretty much exactly this inverse Golden Ratio retracement is a big clue that the trend is still down. It also gives us a useful pivot point. Should the CRB index unexpectedly advance above it, we will seriously consider the alternate count to be correct. That would point to higher commodity prices and, given the subdued outlook for economic growth, a probable return to stagflation.

So, stagflation is definitely a risk, but the point is that such an environment would still be a reflection of a negative social mood. And it is that negative trend in social mood that will be driving the debt and asset price deflation of the coming years.

CRB Index 11-06-2020