Throughout history, global agricultural commodity prices and production have been affected by a myriad of factors that have a very well-defined statistical, cyclical, and correlated historical DNA backdrop.
Those factors include the value of the U.S. dollar, geopolitical trends, cost of capital (interest rates, cash rents, farmland values), demographics (China vs India), environmental factors (Amazon deforestation), and weather volatility trends.
When we look at the above array of factors and their respective historical DNA markers, we find a very unusual synchronicity within all of them that has not seen this type of alignment in over 400 years. The decade ahead, if history repeats or at least rhymes, would see escalating inflationary trends for overall commodities and especially for agricultural commodity prices.
When we look at U.S. dollar trends since the early 1970s when the gold standard was abandoned by the United States, the U.S. dollar has exhibited a 16-year cycle from trough to trough and peak to peak. That cycle comes into play with a trough expected in the 2026/2027 time horizon. A weaker U.S. dollar has the effect of inflating U.S. dollar-denominated commodities relative to foreign prices and has the effect of making our exports more competitive with the rest of the world.
Geopolitical trends throughout the last 500 years have abided by a reliable 53.5-year escalation cycle. That is the point where global geopolitics reaches a crescendo usually ending in a world war altercation. That next geopolitical peak is coming due in 2026/2027. Geopolitical escalation tends to increase inflationary pressures as countries spend and print enormous amounts of money to fight them and also creates a need for greater stockpiling trends just as trade flows become more unreliable. “Guns and butter” is a famous catchphrase for these inflationary impacts of war.
The cost of capital has always been a major contributor to the price of commodities and agriculture commodities. When the cost of money was virtually free, as it was between 2010-2020, expanding supplies and increasing capacities was not a hard investment to justify. Now that the cost of capital has surged, the ability to invest and grow productive capacity in the future is going to be much more restrained. U.S. interest rates follow a 35-year cycle from peak to trough and trough to peak. In the last year, that 35-year downswing has been broken and suggests that the cost of capital will remain high and likely go higher in the years ahead.
Demographics always play an important role in looking at longer-term demand trends for agriculture commodities and other commodities, overall. A healthy demographic deposition is when a country has a large, well-educated young population that is about to head into its peak income-producing years causing a boom in consumer demand. That is especially true if the country has a steadily growing economy. China 30 years ago exhibited that positive demographic quality and set commodity demand on fire, which was the basis for the current state of the “must grow agriculture production every year to meet demand” mantra. However, China now has a smaller pool of younger people and a larger pool reaching their older and less productive parts of their lives. As such, China’s economy is beginning to decelerate, and their demand is now starting to be questioned. How this potential loss in demand plays out will have a lot to do with whether current demand-side expectations need to be altered. The good news is that India has fantastic demographics and should see a boom in consumer demand in the decades ahead. The dance between China and India demographics is a key metric to watch.
Probably the most impactful variable is weather volatility. The more volatile and extreme weather becomes, the more productive potential for agricultural commodities becomes restrained offering significant increases in price volatility to compensate. Since 2019, weather volatility has seen a marked upturn and global yields have flatlined as a result causing various agriculture commodities to see wild changes in production and prices. The long-term factors driving this increase in weather volatility are motion and the activity of the sun.
The sun has a reliable 220-year cycle where overall sunspot activity quiets down for a period of roughly 40 years. They call these periods Grande Solar Cycle Minimums. When the amount of energy from the sun hitting Earth’s atmosphere is reduced, the atmosphere contracts as cooler air in the stratosphere shrinks. This then imposes a major shift in the upper airflow pattern of both the northern and southern arteries of the jet stream. When the sun has anormal activity the jet stream flow is zonal leading to more docile and fruitful weather for production.
However, when the jet stream becomes more undulating and snakelike as it is now, stagnant weather patterns can cause significant weather extremes from record heat, cold, drought, floods, etc. This escalating weather volatility cycle will get more extreme for another decade before starting to ease up.
Another factor is the human impact on local ecosystems. In Brazil, in the northern growing areas, 20% of the Amazon has been deforested in place of planting more crops. This has begun to rupture the Amazon atmospheric river flow mechanics, and rainfall levels in the North have fallen 50% in just the last 10 years. If these trends continue, then growing crops in the North may become much less productive.
The takeaway from the above summary is that current cyclical trends in what we deem to be the most influential variables to agricultural commodity prices and production are in a synchronous pattern that calls for increased commodity price inflation over time and dramatic increases in price volatility. Managing one’s risk on the farm has never taken a more critical role than it does today. Altering farming practices, selecting proper crop insurance, being much more proactive in one’s cash marketing/hedging, and input buying endeavors along with a greater appreciation for international influences will be important factors in determining those that can prosper in such chaotic times. Price and production volatility are a producer’s friend and not a liability so long as proactivity wins out over-reactivity.
Want to go further in-depth with Shawn? Listen to our interview on Fielding Questions.
