Anticipation of a sustained, robust economic recovery combined with expectations of a green industrial revolution have prompted speculation that the fifth commodity supercycle since 1900 is in the offing. Are rising commodity prices simply responding to the forces of supply and demand, or have we marked the start of a sustained, above-trend structural demand change across a basket of commodities?
In creating a cooperative system supercycle model, this work takes a slightly different approach from the many research notes grabbing headlines. It focuses on the meaningful components associated with the cooperative system against the backdrop of past supercycles to help uncover the drivers, what to watch out for and how these factors could impact the cooperative system.
Supply and demand for commodities can be somewhat inelastic in that it takes time for producers and consumers to react to new price environments. Producers must forecast future supply and demand as they make capacity investments, sometimes years in advance and at significant risk.
Near-term price cycles happen all the time. Supply and demand help drive the clearing prices of commodities throughout the day, week and month. By contrast, a multi-year supercycle is driven by significant, chronic undercapitalization in multiple commodity spaces that are met by a significant shock to demand(s). The time it takes for supply to meet the step-up in demand(s) contributes to long periods of above-trend prices.
Traditional commodity indices comprise a basket of commodities important to the broader economic picture, including fisheries, forestry, energy, metals and agriculture. In contrast, we are concerned with the commodity index that reflects those commodities that are important to the cooperative system ("cooperative system commodity index").
To illustrate this, we have created an index of corn, soybeans, wheat and crude oil prices over the past century, normalizing prices to 2020. To better reflect the cooperative system, the agriculture component of the index is weighted 80%, while oil is weighted 20%.
The predicted value (blue line) shows how the cooperative system's commodity index has cycled across the last century. These price cycles move in tandem with the four distinct and widely recognized supercycles in history (green bars), each generally driven by industrialization, which has spurred demand shifts.
Each period has underlying drivers, including population booms, war, government policy or pandemic. Not only have these events brought immediate profound change to commodity prices, but they also impacted the mindsets of producers, consumers and investors. It is no wonder these parties are contemplating the commodity outlook resulting from a surging economic recovery and near global alignment on saving the planet.
One way to help understand where we are in the curve is to look back at how past supercycles faded. CHS Global Research statistical techniques tailored for the cooperative system has revealed four supercycle peaks during the last century: 1926, 1950, 1985 and 2012.
Associated with each of these peaks is the number of years it takes to reach the bottom of the cycle. For the first three cooperative system supercycles, it took 11 to 12 years to reach the trough. For the current supercycle, the downward trend that began in 2012 has lasted eight years. History tells us we have not yet reached the bottom of the current supercycle, but the end could be near.
These peak-to-trough insights for the cooperative system also reveal how prices in our basket of commodities have declined for each supercycle. The trend suggests the peak-to-trough declines in price are tightening. In the 1926 and 1950 cycles, corn and soybeans anchored the declines, while oil had a much more profound impact on the price declines that began in 1985 and 2012.
One key adjustment that will affect future supercycles is the financialization of commodities. Since futures markets were established in the 1860s, commodities were used by those with a direct link to the product and for hedging purposes. That is until the mid-2000s, when open outcry waned and gave rise to the machine or trading terminal.
Anyone with a computer now has access and ability to participate in commodity commodity markets. Whether you are a cab driver in Manhattan, a rancher in Texas or a flour mill in Minneapolis, the commodity markets are open and accessible to all. Some of this growth has certainly been driven by retail investors wanting exposure to commodities to diversify their portfolios.
Chart 4 illustrates that in less than two decades, the level of participation in the corn market is five times greater than it was in 2000.
We will have another supercycle, but it isn't happening tomorrow. The green revolution is the most likely catalyst on the horizon, and it will have real impact on the cooperative system whether farm equipment converts to electric power or not. Oil will continue to play a role in the energy transition on the front end, while renewables like ethanol and renewable biodiesel will necessarily carve out a longer runway and bigger roles.
In the meantime, ride the bull and pay attention to micromarket fundamentals in agriculture. We view the next year, and maybe the year after that depending on how 2021 acres play out, as supportive for corn and soybeans.
With low stocks and high prices, you can bet U.S. farmers will plant as many acres of corn and beans as possible, perhaps opening their pocket books to spend a little more on fertilizers and crop protection products to drive yields. Higher prices and additional bushels will eventually find their way into the cooperative system and into crush plants, ethanol facilities, elevators and exports. The cooperative system has an opportunity to participate in more bushels and grow its industry presence in the months ahead.
The material provided is for informational purposes and should not be viewed as a recommendation to buy, sell, or hold any commodity contract, investment, or security or to engage in any risk management strategy or transaction. This information is taken from sources which we believe to be reliable but is not guaranteed by us as to accuracy or completeness. The information and opinions represented are those of the author, are subject to change and may be inconsistent with the views of CHS, Inc. or any of its subsidiaries. If applicable, this material should be considered a solicitation by CHS Hedging, LLC and not any other CHS entity. Trading Futures or Options on Futures involves substantial risk of loss and is not suitable for all investors. Past Performance is not indicative of future results.