Article / April 30, 2021

3 Under-The-Radar Inflation Hedges

Anyone who’s been following Farmfolio knows that inflation – and an accompanying boom in commodities – is a sure thing.

Although everyone’s still content shaking the stimulus champagne bottle, there are serious vulnerabilities in underlying monetary policy and market conditions. 

The smart money has already begun to look outside the stock market, buying real estate and commodities that face a pandemic-induced supply crunch.

Now, deep pockets are finding their way to asset classes that ongoing catalysts will send well above current valuations. And when the wealthy arrive at the assets listed here, they’ll bring price inflation with them. It’s safe to say we haven’t seen anything yet.

These less-discussed assets are rapidly appreciating in today’s shifting economic environment. These assets could make a great portfolio hedge in the long run, and the value of protecting your capital in volatile times is understated.

Prices for Industrial and Precious Metals Will Explode if This Happens

 

History doesn’t repeat, but it often rhymes.

The 2000s commodities boom followed the collapse of the 1990s housing bubble and saw commodities as a safer bet against an economy turning sour. 

Investors worried about economic turmoil liked the supply-demand nature of commodities, compared to highly speculative stocks. The same trend is happening today.

Additionally, just like in the 2000s, we’re witnessing deeper shifts in the renewable energy sector, squeezing demand for scarce metals.

The call for “green metals” like copper is increasing partly due to a global renewable energy transition. Goldman Sachs predicts an over 60% price rise over the next four years! 

Goldman coined copper as “the new oil” for this decade, with lithium in close competition for the title.

China and the US require copper for enormous infrastructure projects and energy transitions over the coming decade, sparking fierce competition for the vital resource. 

China’s Belt and Road Initiative and Biden’s huge infrastructure bill will be significant catalysts for copper. 

In other words, acquiring enough copper is a matter of national security for the two superpowers.

The automotive industry is heavily pivoting toward EV, which will deflate copper supplies even more for the sector already starved for the metal and dozens of others.

The current chip shortage is slowing down automakers and creating a price spike of its own. The bottleneck will only benefit copper as well as rare metals when supply chains catch up.

Establishing new sources of copper can take more than four years. Still, the current spike in copper prices incentivizes billionaires like Robert Friedland to take the plunge.

The billionaire has said, “the demand is going to be psychedelic and fueled by a rise in electric vehicle production and sales.”

Two commodities are taking off in the mid-term thanks to the EV boom and have room to grow. 

Palladium and rhodium are relatively rare materials necessary for the ongoing expansion of the EV sector.

 

Prices for these two metals have already climbed by orders of magnitude.

Rhodium prices jumped more than 100% in 2020 alone, thanks to the “emissions clampdown.” 

The rare metal has no futures market and an extremely limited supply, meaning it is subject to significant price swings due to the smallest changes in supply. Such a situation will attract attention from speculators if it hasn’t already.

With Elon Musk exciting the masses and the whole world challenging Tesla’s grip on the EV market, it’s safe to say that the EV meme is here to stay. 

Biden’s already earmarked $174 billion to boost electric vehicles.

We likely haven’t seen the end of the EV “green tidal wave,” and that will roll over to the underlying commodities.

Just look at this chart of palladium over the last year:

We expect this is only the first inning for commodity prices if banks flood the market with credit or the Fed goes on another QE rampage.

JP Morgan’s Chief Global Strategist David Kelly understands the remarkable effect the current fiscal environment will have on commodities:

“While near-zero short-term interest rates are making it easy to finance positions in precious metals, eventual Fed tightening could prove a further headwind in this space as well as for commodities in general.”

Timberland And Lumber Industry Productive Assets

 

Lumber prices have gone nuts, breaking price records at 200% higher than last year. 

Michael Goodman, director of specialty products at Sherwood Lumber, told Fortune, “I don’t think we ever go back to levels we had prior to this boom.”

Sawmills are buying lumber back from lumberyards, creating an “unheard-of” situation where products are pushed back up the chain thanks to today’s market volatility (Source: ZeroHedge).

What’s fueling the run on timber? 

When you have a global economic shutdown, followed by a supply bottleneck thanks to ongoing restrictions, you get a multi-faceted setup for higher demand in real estate.

Real estate and housing demand continue to skyrocket, thanks largely due to homeowner DIY projects and in part because of the fierce bidding war between speculators looking to outrun asset price inflation.

At long as interest rates remain low and either QE or bank loans are easy to come by, we should see real estate and lumber demand continue to rise.

The thesis is simple: To build houses, you need timber, and there is only so much productive timberland available, not to mention a supply crunch due to the Pandemic and a supply chain slowdown during the last U.S. housing crisis.

Lumberyards are already scattering to meet the demand for lumber. You can capitalize on the trend by owning the stumps. 

Owning timberland outright would be a dual-layered suit of armor for your capital, earning outstanding yield along with real asset appreciation and a fine piece of collateral. 

[ 3 High-Value Tree Crops (And Why to Invest) ]

Productive timberland prices may appreciate surprising levels in the short run as other investors speculate on futures and proxy company stock prices. 

However, demand for the underlying asset will steadily rise over the long run. 

Productive Farmland and Ag Real Estate

 

The Real Estate Boom is clear as day, but what’s less obvious is that agricultural real estate will ride that same wave.

Farmland is productive real estate, historically an ideal way to benefit from capital market inflation and consumer products inflation simultaneously, and provides a direct tap into the commodity supply chain.

Goldman Sachs thinks we’re at the cusp of a Commodities Supercycle, driven by a post-pandemic recovery and a global green industrial revolution:

A Commodities Boom will have an appreciation effect on the agricultural sector for more reasons than we can list here.

To put it simply, as energy prices go up to feed the boom in every other commodity, energy prices for producing agricultural products will rise in tandem.

For all these reasons, there’s a huge upside and level of security in owning productive farmland – it’s a game that the smart money doesn’t want you to know about.

Globally, farmland is one of the most secure, reliable asset classes there is. Even in developed markets, farmland has seen strong appreciation and yields, and in emerging markets, the returns are even more outsized:

Many entities will take on risk in agricultural real estate through bank loans and low-interest rates in the coming years. A lot of them will blow all that money away. 

Don’t fall for the short-term market fads. Look for ways to protect and grow your capital.

Because ag real estate tends to remain stable through long-term economic cycles, outright owning your farm makes all the difference. 

Ownership puts you in front of the banks because you own something that the whole investment world desires, and that’s true alpha.