The Rise and Fall and Rise of Commodities – A story bound to be told again.

Commodity prices have been in a long-term downtrend while stocks have soared for much of the past decade. Given that we are twelve years into this bull run in stocks and historically asset class returns have always reverted to the long-term mean, one might ask: is this the time to buy commodities?

A major factor in the direction of commodity prices is the trend of the US Dollar because most commodities are denominated in Dollars. The Dollar has been in a long-term uptrend for much of the past decade but began weakening sharply last July. As the pandemic roiled the economy, fiscal and monetary stimuli acted to weaken the Dollar, and by extension boost commodity prices.

US Dollar Index (DX) 2-year Daily Chart

Commodity sector performance is principally driven by the forces of supply and demand. The pandemic has exacerbated price trends through supply shortfalls and stronger than expected demand across the global economy. One of the weaker sectors of the commodity markets over the past decade has been the grain markets. Since August we have seen a sharp change in trend; for example, the price of corn and soybeans have each risen by more than 50%. In addition, the El-Nino Southern Oscillation climate phenomena is currently in the La Nina phase which could intensify cross commodity asset volatility with increased yields in the Northern Hemisphere and reduced yields in the Southern Hemisphere. Only time will tell if these movements are transitory in nature or the beginning of a durable long-term trend.

Corn © One Year Daily Chart

Soybeans (S) One Year Daily Chart