Here's how China could launch a 10-plus-year 'super-cycle' in commodities - one that survives the next global recession
- Wells Fargo says China's huge investments in infrastructure drove a 12-year commodities boom, and that in the future, its demand for food could lead to a similar boom in other commodities.
- Strategist John LaForge says in the next few years, the prices of food crops like corn are likely to surge as Chinese food consumption increases and the country imports more food components.
- He writes that that demand could endure through several global market rises and recessions.
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An old economists' saying holds that "when the US sneezes, the world catches a cold." Wells Fargo says China is exerting similarly strong influence over the commodity market.
John LaForge - head of real asset strategy for the Wells Fargo Investment Institute - says within the next five years, the price of corn, wheat, and other crops could go into a years-long rally because Chinese citizens will to start eating more and better food.
To meet that surge in demand, he says, China will need to ramp up its already-huge imports of food. That could end a long stretch that's seen flat or declining food commodity prices and weak returns for related commodities.
"Food commodities could very well lead the next commodity bull super-cycle," he wrote in a recent note to clients.
In an interview with Business Insider, he said commodity prices move in much longer cycles than stocks usually do: They'll climb for 10 to 15 years at a time and then go into downturns that last about as long.
The "super-cycle" term means those rallies don't necessarily end even when the global economy goes into a slowdown or recession, so they last through multiple economic cycles. In his estimation, commodity prices have been in a bear market since 2011.
While China's economy has grown by an enormous amount in 25 years, LaForge says people in China still consume fewer calories than people in countries like the US and South Korea. He says that's likely to change.
The chart below shows how much demand is still laying dormant in China. The red line shows that consumer spending in China makes up only about 40% of that nation's economy. In the US, the figure is around 70%. But as the red line rises to a mark of 50% or more, China's food consumption is likely to grow rapidly.
"A financially healthier consumer often means more money in the pockets of people," LaForge wrote. "This, in turn, can lead to more (and better) food consumption."
World food prices have been relatively flat since 2015, according to LaForge, who also notes that agricultural commodities like coffee and corn have delivered weak returns compared to other commodities. Overall, returns have fallen steadily over the last three years.
In his view, that means the stage - or the dinner table - is set for a long surge in food prices.
The reason he's predicting a global rally is that China is unlikely to ever be able to grow enough food to meet its needs. If demand rises, it will have to buy far more food than it does now. He adds that India, the second-most populous country in the world, will also probably ramp up food imports.
Combined, that could create a long rally similar to the one that recently played out with oil, gold, copper and soybeans: China drove a 12-year bull market in those commodities 1999 to 2011 as it made huge investments in infrastructure like roads and bridges.
That's faded into what he calls the commodity bear market of today, but LaForge says it won't be long before the situation changes and the check arrives.