Commodities: A Supply-Side Idea

by: Enzio von Pfeil

Blues

Yesterday, the Bloomberg Commodity Index plunged to its lowest since May 2009, i.e. a five-year low. Consequently, the Australian dollar reached a four-year low against the greenback.

Supply-Side Idea

Even I know that commodity producers work on break-even rates: There is a point at which production costs exceed sales prices, and at this point, production incurs losses. Just how far are we from this break-even line, I wonder?

Look "S," Not "D"

Markets keep sulking about the abysmal global Economic Time: excess supply of money and excess demand for goods. Thus, their view of infinitely low commodity prices is based on slack demand. Well, they are looking "D" for demand. I am looking "S" for supply; once producers deem it unprofitable to keep producing, guess what? They will stop producing. And if (low) demand remains constant or even falls, the net supply of commodities shrinks. So up go their prices.

Investment Implications

Check out this supply-side idea with your favorite commodity analysts and come up with some commodities where supply cutbacks are the most imminent. Then start buying in to our supply-side story.