The recent spike in inflation was a shock to many.
It took consumer prices to multi-decade highs.
And now, the situation in Ukraine has been another surprise.
As of writing, there’s no sign of a peace deal.
Global governments are hammering out one sanction package after another against Russia… crippling its economy and the country’s financial system.
The effects of these actions will spread like wildfire. When a crisis like this one hits, there’s no easy or elegant solution.
This means inflation is here to stay. Not only that, but it could get higher… and sooner than expected.
From commodities to food and energy… prepare for a very expensive year.
In a moment, I’ll tell you what to do about it.
The Food Supply Chain Is Hit… Hard
Together, Russia and Ukraine produce about one-quarter of the world’s wheat.
So that supply is under threat right now.
Which will make it even more expensive than it already is… In fact, the price of wheat soared by 44% throughout the past year alone.
And just over the previous month, it rose around 17%.
Wheat could get even more costly as major supply routes require access to the Black Sea, which is a challenge now given the military conflict in Ukraine.
Analysts point out that if Russia can’t ship out the remainder of this year’s crop, the price of wheat could go up by one-third.
The price increase will maintain food inflation across the world… and if the sanctions last until 2023, Russia will find it hard to sell any wheat to its global customers. Which may have an even bigger impact on the price of wheat.
This is bullish for the commodity, but terrible for consumers.
But there’s more…
There is another looming crisis, and it has something to do with electronics and the electric vehicle (EV) revolution.
Russia’s Aluminum Producers Are at Risk of Sanctions
Russia’s Rusal is one of the world’s top primary aluminum producers.
It has not been hit by international sanctions… yet.
The reason? Aluminum is critical to the U.S. About 10% of U.S. imports come from Russia.
That – plus other factors – created a “perfect storm” for aluminum. The U.S. will wait as long as possible to hit this sector with sanctions.
First, aluminium is in high demand due to the auto industry. It’s used in both internal combustion engine (ICE) cars and EVs as a lightweight metal… which allows for lighter cars and less fuel to power the vehicles.
Second, aluminum is vital for electricity transmission in distribution. Because of its physical properties, the metal is perfect for the power grid. For example, since it’s lighter than copper, aluminum needs fewer support structures.
Aluminum has other uses, of course, but as far as electrification goes… it’s in demand almost anywhere you look.
Now, the aluminum market is in a state of deficit. Which means there’s more demand than supply.
In 2021, the deficit reached about 1.9 million tons (4.2 billion pounds).
In Europe, high energy prices made refining aluminum unprofitable. Some mills shut down, further reducing supply, as Bloomberg reported.
Despite the high demand, the possibility of an aluminum ban is still there.
And that’s because the U.S. will likely continue to hit Russia with more sanctions.
With few sectors left to sanction, aluminum might become a target.
This would only make matters worse for the global supply chain… and push the price of aluminum upwards.
What to Do About Higher Prices
Commodities are surging… and the best way to play this is through exchange-traded funds (ETFs).
I suggest the Invesco DB Agriculture Fund (DBA). It holds a diversified portfolio of futures, including those on soybean, wheat, and corn.
As a reminder, futures are contracts where you buy or sell an index to be settled at a future date. Investors use futures to speculate on the price direction of an index.
You can also consider the iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU). It tracks aluminum futures and provides exposure to the upside that I see for this metal.
In the meantime, I will keep tracking the crisis and update you on what it means for commodities.
Analyst, Casey Research