Highlight / January 16, 2021

Are We On The Cusp Of A Commodities Super-Cycle?

Throughout the financial world, there have been rumblings of a major market shift that could create huge opportunities across a range of asset classes.

According to some experts, we’re poised to enter what’s called a ‘super-cycle’ – a sustained period of rapid growth – in a sector which has been spurned by investors for quite some time.

I’m talking about commodities. As we enter 2021, many in the financial world foretell of a boom, naming several factors that could lead to a perfect storm for commodity prices. Bu what are these factors, and how can investors gain exposure?

Inflation: The Weakening Dollar

The dollar is cratering relative to other currencies, a massive reversal from the previous rally we witnessed in early 2020. 

We’re watching a market trend set the course for well into 2021 as investors flood into riskier assets that offer higher returns. 

Near-record low bond yields are partially to blame for the increasingly weak dollar. With rates failing to beat inflation, investors are willing to take more risk for greater potential reward. 

Another more recent component of collapsing dollar valuations is the market expectation of meaningful fiscal stimulus. 

Scarcity drives value. As the Treasury and Federal Reserve make dollars less scarce, the dollar’s value inevitably declines relative to other currencies. The dual forces of low yields and great stimulus efforts will continue to pummel the dollar for the foreseeable future. 

What does this have to do with commodities? Well, commodity prices usually rise in tandem with inflation, making them an oft-cited hedge. With inflationary pressure on the rise, it’s possible that commodities with experience a strong upward trend.

A Commodities Syper-Cycle?

 

Despite the global scramble for favorable yields, commodities remain overlooked by the majority of investors. Underneath the seemingly mundane price action in this asset class lies tremendous potential, especially if we enter into another commodities super-cycle. 

Equities vs. Commodities Source

 

Doug King, Chairman of RMCA Group, told MarketWatch, “The only way to get commodities moving in an inflationary, buying power way is a weaker dollar.”

Many commodities have already more than recovered — they’re breaking out. Copper has recently soared to two-year highs, and lumber prices have more than doubled in the wake of the Covid-19 pandemic. 

The World Bank expects this upward trend to continue: “Looking ahead, oil prices are expected to increase gradually from current levels and average $44 per barrel in 2021, up from an estimated $41 per barrel this year… Metal and agricultural prices are projected to see modest gains in 2021.”

Even majors like Goldman Sachs and BlackRock are heralding the return of the commodities boom. Goldman, for example, insists that the upward trend in commodities is based on underlying structural factors – not just the COVID-19 recovery. 

“Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play,” said Goldman representatives, adding that we could be at “the beginning of a much longer structural bull market for commodities.”

Commodities and equities are generally inversely correlated – as the dollar weakens and equity markets falter, commodities outperform. With the COVID economy propped up by government stimulus, there is likely to be some correction in 2021.

In other words, commodity prices will strongly benefit. But commodities are a vast universe, and some will fare better than others. Where to begin?

Gaining Exposure

 

There are a number of ways to gain exposure to commodity markets. One of the most common is to purchase the physical raw commodity which can be resold at a spread. With this route, the investor must buy and store the commodity itself, which can be a headache even for the experienced.

Another popular method is the futures market. Futures contracts can be a good way to profit from price movements in certain commodities, and can provide outsized returns to those who can predict price movements. ETFs are another widely used method.

A basic overview of commodity price cycles (Source: policycenter.net)

But not everyone likes the futures game, and direct purchases can be risky. Even Fidelity notes that these investments are “These are highly volatile and complex investments that are generally recommended for sophisticated investors only.”

In that case, what vehicles are available for those who want to gain exposure to the coming commodities super-cycle but aren’t interested in futures or ETFs?

Real Assets in Agriculture

 

If commodity prices do surge, many economic sectors stand to benefit: oil, copper, and natural gas, for example. But when people think of commodities, there is one industry that stands out from the rest – agriculture.

Agriculture commodities are some of the most popular on the market. Beef, coffee beans, orange juice, wheat – these goods and many more will benefit from the rise in commodity prices.

So how can you gain exposure to these commodities without having to buy them yourself, or risk big money with ETF and futures plays?

Simple: farmland. Granting exposure to commodity prices is just one of the many benefits of farmland investment, which we’ve covered extensively in the past. Other benefits include:

  • Hedging against inflation
  • Long-term appreciation
  • Accessible for Retirement Portfolios
  • Negatively Correlated to Equities and Bonds
  • Recession-proof
  • Consistent yields

If commodity prices do spike, farmland yields will feel the effects. And if we really are entering a super-cycle, then higher prices will be sustained for as long as a decade.

Which Commodities?

 

Of course, like commodities themselves, farmland is a vast universe. “Buy farmland” is too general. Where? What type of farmland? What crop type?

Answering these questions requires an extensive due diligence process that we just don’t have time to get into here. But if you’re interested in farmland as a means of gaining exposure to rising commodity prices, the first step is to look into the commodity in question.

Not all agriculture commodities are created equal, and not all will benefit equally from the potential super-cycle. Consumption of meat, for example, is declining in the developed world, and the rapid industrialization of emerging-market grain sectors will lead to stagnant prices for things like wheat, barley, and soy.

With the COVID-19 situation worsening, consumers are taking their health more seriously than ever. That means vitamin C – and that means citrus. Orange juice futures already spiked at the outset of COVID, and lemons and limes have seen strong residual effects. These trends are likely to last long into the future.

When it comes to gaining exposure to commodities through farmland, you could do a lot worse than citrus fruits.

Conclusion

 

While there can be no guarantee that we’re actually entering a super-cycle for commodities, many top players in the financial world seem convinced that we are. And with inflation on the rise, commodities might just be the right way to hedge.

But futures and other vehicles are risky and complex. For those who want to gain exposure to commodities in a hands-off, stress-free way, farmland is an option not to be overlooked.

 

 

 

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