Don't Go Over the Cliff on Commodities

03/04/2011 11:55 am EST

Focus: COMMODITIES

Joe Battipaglia

Market Strategist-Private Client Group, Stifel Nicolaus

Commodity prices can only keep rising for so long, and a peak later in 2011 will lead to price relief that benefits both companies and consumers, says Joe Battipaglia in an exclusive interview with MoneyShow.com.

Joe, you’ve spoken a lot about commodities and their impact on the economy and the markets—and obviously, they’ve had a huge run. Although recently there has been some worries about them. What do you see for commodities over the next year or so?

I think for the next year or so you’re going to see a top in commodity prices. In other words, these prices are hitting their tops and will start to slip.

That actually has positive implications for the underclass of the world, and has positive implications for the developed economies.

And for some entrenched governments.

And for some entrenched governments, absolutely. Because rising prices here mean more distress and economic activity and dislocation—and that’s not good for anybody, particularly with these highly leveraged economies that we have today.

What I see happening is producers going at it with a vengeance to take advantage of the high prices, and the sources of the obvious growth weaning—particularly the Chinese, where volumes consumed on a short-term basis won’t be as robust as everyone anticipated.

The laws of supply and demand are very harsh in this manner, so when you have excess supply relative to demand your price will come down. I look for price relief for commodities in the near future.

Across the board?

Pretty much—cotton prices, wheat prices, oil prices, energy generally. I do see them going lower.

Well, things like wheat, for example. There have been some seasonal factors, some weather factors. We’re in a really tough weather cycle, and Russia’s had problems; the grain harvesting in Australia also has had some problems with floods. Are there some of those factors that might prop up some of those prices?

I don’t think so, because—as we’ve learned in past cycles—when farmers think they’ve got a great price for whatever they produce, they start planting it in their own bathtubs.

So the next season, which is right around the corner, is going to be overplanted—too much acreage—and now all of a sudden all these price supports kick in, so that’s why food inflation never bothers the Federal Reserve and it shouldn’t bother investors. I think it’s a come-and-go thing.

Now, is it true that India and China, as they move up in living standards will have a greater impact? Yes, but that’s a longer-term phenomena that can be met by innovative techniques for planting, etc. For the short-term, I’ve think we’ve topped out on these prices.

So, what does that mean for investors and for the economy?

I think it means very good things, because if the cost of inputs goes down, then everybody from Pepsi-Cola benefits in terms of their margins, and the consumer doesn’t see price inflation for loaves of bread, milk, and things of that nature.

I think the biggest tax in America today, without a doubt, is the rising cost of energy. It saps other spending. It’s the ever-ready consumable—it just gets you from here to there. So if we can get some relief at the pump that will go a long way to help in GDP in the second half this year.

So, you say it might actually be good for the stock market too. I mean, except for energy companies and commodities-based companies, a lot of the others will do very, very well.

Right—and Brazil might not have a performance factor in their economy because it’s got that aspect to it. Australia and New Zealand will have some effect from this, as well as mining companies, and on down—but that’s the minority relative to majority.

Everyone else stands to be a beneficiary if we get those inflation tendencies out of the picture.

Do you have one stock pick that might benefit from this?

I would say Hormel (NYSE: HRL). Hormel is a food processor.

Aren’t they a SPAM producer?

That’s right. Energy cost, animal cost, all that stuff is going to affect them. If we can get some relief there it’s going to be good for them.

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