Among the bits of wisdom I first received as a young analyst was from a commodities trader who told me, “Price cures price.” Meaning when the price of a commodity had plunged, producers would likely curtail production of that commodity as it was no longer in their economic interest to produce more of it and that curtailing of production would lead to a dwindling of supply and a rebound in price. Conversely, when the supply of a commodity was limited and prices were rising, producers would likely increase production to take advantage of the favorable economics until – eventually – too much supply would cause the price of the commodity to decline. Additionally, consumers refusing to purchase high-cost commodities or finding suitable substitutes can trigger a price drop - low prices cure low prices, and high prices cure high prices.
While the comments by the trader were directed toward commodities, one could argue in a free market where capital goes where it is best treated the dynamic of price cures price should hold – broadly speaking – across any part of an economy that is commoditized. We mention this as we are living through a meaningful spike in the price of any number of goods and services, and there are questions as to whether this time the spike in prices might prove different, that high prices won’t bring on enough incremental supply to lower prices either because of a lack of workers or the unraveling of global supply chains, or some other reason. It will likely be months before we know if enough supply of goods and services has come online to meet surging demand and temper recent price inflation, though we find it interesting lumber prices have corrected 65% from their recent all-time high as demand cooled in the face of high prices (though prices remain 30% above their pre-pandemic level). For now, we still believe that price ultimately cures price.
Tagged: Tim Holland, weekly wire, market perspectives, price, commodities