For the past year I have been convinced we are in the midst of a commodity supercycle. The reason is simple. From last September virtually every commodity has improved dramatically in value.
The reasons for the gains are open for discussion. But the facts remain undisputed. All commodity markets have rallied sharply over the past year.
But after the past few weeks I am now convinced that the United States and the world are in the early stages of a commodity supercycle that will run another 10 years.
I am not alone with such thinking. Jeff Currie, global head of commodities research at Goldman Sachs, stated on Bloomberg TV this week: “This is just the first inning of a multi-year, potentially decade-long, commodities supercycle.”
To a large extent his bullish argument is based on a forecast of crude oil prices rising to $90 a barrel. The crude market is currently trading around $75 a barrel.
Historically, crude oil is a leading indicator market for commodities, per se. Thus, if crude continues to move higher, it may pull other commodity markets higher, as well.
In my book, “Haunted By Markets,” in a chapter entitled “The Three Most Important Markets,” I stated: “For years the three most influential of all markets are corn, crude oil and bonds. Each can have a powerful influence on a related market and each can, under the right circumstances, impact the economy as a whole.”
When forecasting grain prices the most reliable tool is the stocks to usage ratio, or ending supplies compared to demand. Simply put: The higher the ratio, the better supplied the world is with that commodity. The smaller the ratio means the world has far less supplies.
In the United States and for high protein wheat, the ratio is the smallest in history, which in theory is quite bullish. And corn tends to tag along with wheat.
As for the bond market, over the past week prices have dropped dramatically out of fears of rising inflation, the Fed cutting back on their stimulus measures and the distinct possibility interest rates will be raised in early 2022.
Bonds fear inflation above all else. If crude and grains are headed higher, bonds are headed lower.
This week, oat prices came within a few cents of a new all-time high. This week, cotton prices rose to $104, a 10-year high. This week, crude oil prices rose to a three-year high.
This week, Minneapolis wheat came within a few cents of hitting a level not seen since 2012. Natural gas, or fertilizer, hit a seven-year high. Heck of a week, to say the least.
A few recent headlines hinting that foodstuffs are headed higher yet ,even though grocery prices are now at a 50-year high. From YahooNews: “World Food Costs at Risk of Soaring as China Faces Tough Harvest.” From Bloomberg News: “The Country That Makes Breakfast for the World Is Plagued by Fire, Frost and Drought.”
From DailyMail.com: “Children born in 2021 will live on average through seven times as many heat waves, twice as many wildfires and nearly three times as many droughts as their grandparents, a new study has warned.” From FarmProgress.com: “Food prices poised to surge with fertilizer at highest in years.”
The last supercycle for commodities started in the early 2000s and was driven by emerging markets such as China, Brazil, Russia and India. Commodity prices back then kept rising until crude oil peaked in 2008. However, from the pandemic low in April 2020, commodities, per se, have outperformed the last supercycle.
It does seem we are indeed in the early stages of a supercycle that will last another decade. However, the key feature of a supercycle is not how quickly or how high prices rise so much as how long prices continue to increase. I’m guessing a decade.
The key to success for ranchers, farmers or ag speculators is marketing. It is when to buy. When to sell. When to sit tight. It is about timing.
If we are in the early stages of a supercycle for commodities that will run another decade, I cannot emphasize how important it is to hone your marketing skills. In the decade ahead, it is all about marketing.
Not long ago, The Economist published a piece entitled, “As food prices soar, big agriculture is having a field day. How long will it last?” Do not allow big agriculture to have a field day by themselves.
Hone your marketing skills. Be mentally and financially prepared for the further unfolding of the supercycle that has a decade to run.
Take time to check out commodityinsite.com. I would enjoy working with you in the dynamic times ahead.