In 1999, prices of the some of the top 25 essential commodities, especially food related commodities including Soyabeans, Corn, Wheat and Sugar (all essential for the people’s survival) had reached such low prices that food producers were going out of business. Under the threat of this deflationary period, the European Union and the ECB were created as measures to unite markets and provide liquidity so as to avoid the “starvation of European countries”.

The following Figure 1.1. helps illustrate my point. In the beginning of the chart it can be seen that the average price for the commodity Index was about $120 in 1999. In the best period (the bull market of 2004-2007), this price increased by a factor of 4 to $480… This indicates that commodities producers were making profits and managed to improve quality of production and final goods sold to consumers.

Figure 1.1. Commodity Index

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In 2020, we are at price level of $106. This may be confusing as people believe inflation should drive commodity prices up. However, the question is has there been any inflation in the European Union in the last 20 years?

The real answer is no, based on the commodity index price, it can be seen that there has not been real inflation in Europe for about 20 years. This shows that for the last 20 years the Eurozone has faced deflationary pressures and disinflation to say the least. I have explained this a bit more in my e-book, which is also posted on LinkedIn.

The implications

In 1999, there was such a wide spread failure and bankruptcy of commodity producers that the European Union had to be created to “tackle” this deflationary pressure for the first time. Based on current prices of commodities, it seems that ECB could intervene one more time 20 years later on behalf of the European Union with the same purpose.

For companies, it means “brace for impact” as profit margins will become even slimmer until 1) enough of the existing and inefficient players go out of business or 2) the ECB intervenes again providing liquidity through banks so these commodity producers can survive.

For people, it means there could be a lack of supply at specific points in time. Alternatively, it means that in order to preserve supply levels, the quality of production of these basic commodities could go down significantly (e.g. bread with rabbit hair to compensate for lack of wheat as wheat producers go out of business, this has happened in the past (at least in countries like Bulgaria)).

Practical implication

Do not panic because you are one of the few people in the world who know what is going on. I have called this series “news of the news” because it is not yet even become a topic of discussion from traditional media. Therefore, I believe we have about 6-12 months before things start to worsen and about 12-24 months before they get to the escalation point at which ECB will have to intervene.

It could be that because EU did not exist in 1999, it took 3 years for countries to deal with this problem. The question is, will having the European Union and ECB help avoid this issue or will it be a post-problem solution.

I would personally bet on the latter, i.e. there will not be an intervention until a significant enough problem occurs.

Stock up on some basic commodities (flour, coffee, chocolate, sugar, etc.)

Speculator implications

Shorting indexes to new lows. However, this is not my type of trade as I would not want to actively bet against Europe’s starvation to make money. It gets me sick to my stomach.

I’d rather go long on other valuable commodities – weed (as in Marijuana) producers, gold miners and crypto (and crypto miners).

Let us not forget Bitcoin is deflationary and in such cases, it makes more sense than any other commodity (if we consider it “digital gold”).

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