The pork cycle is to economics what the law of gravity is to physics. You can count on it. Every single time. The only thing that makes economics the trickier science, is timing. Because you never know when the market hits peak or bottom. But economics is not an exact science. Investors don't need to get the cycle exactly right to make money. About right cuts it.
The key to understanding the broad commodity cycle, which functions just like the pork cycle, is the time lag between the investment decision and the creation of new supply. What would happen in case there wouldn't be a time lag? An uptick in demand causes a price increase. The price increase causes additional investment. And the surplus demand would immediately be filled by new supply. Same thing on the downside: demand drops, price drops, investment falls, and production would be cut instantaneously. Our hypothetical result: steady prices.
Of course, reality is different. Breeding the hog takes time. When the price of oil or copper rises, companies can probably squeeze out some extra output. But to substantially increase production to fill the new demand, they need to increase exploration budgets. That means hiring new geologists, given that companies probably fired those when prices were low – if they are still around. The geologists need time to search for the treasure. When they find something, engineers need time to figure out how to drill the well or build the mine. Permits need to be arranged. The company might also need to raise capital. And only then, construction would commence.
By the time the whole new enterprise is up and running, demand starts to drop. Due to the price mechanism, users increased efficiency or switched to substitutes. Or a recession hits. At that point, the commodity producers will be holding the bag. And anyone who invested in commodities lately will know exactly what that means.
Our current cycle started in December 2001, when China joined the WTO. That event marked the beginning of the greatest commodity boom the world ever witnessed. The hungry Chinese giant craved commodities. Commodity producers were throwing everything at it, but it never seemed saturated. Then the global financial crisis hit in 2008. After a commodity collapse, prices bounced quickly and forcefully. This strengthened the China hypothesis even further. We were now in a new era.
