2021 Grains Outlook - Part I The Big Shift
Teucrium | December 22, 2020
2021 Grains Outlook
The Big Shift - Part I
Jake Hanley, Portfolio Manager
Last year we wrote that the 2020s could possibly mark the resurgence of a commodity bull market. That thesis was put to test early this year as pandemic fears gripped markets and initially caused assets across the globe to head lower. The Refinitiv Equal Weight Commodity Index briefly dipped below the 2008 financial crisis low, before reversing higher. Now the index looks poised to break through 5-year highs, a move that could potentially validate our commodity bull market thesis.
Chart 1
Chart created by Teucrium using Bloomberg Finance LP on 12/17/2020
Refinitiv Equal Weight Continuous Commodity Futures Price Index
Quarterly Price Chart 12/31/2000–11/30/2020
Past performance is not indicative of future results
Taking the grains specifically, we might one day point back to 2020 as the year that began the Big Shift. The Big Shift would mark the transition to a secular bull market. Price trends are indicating that the Big Shift in grains may already be underway. As the market picture becomes clear over the course of 2021, we will be looking to the fundamentals for confirmation of the Big Shift.
Ultimately, whether or not grains and commodity prices continue to move higher is anyone’s guess. Still, one trend remains clear: increasing investor appetite for exposure to alternative asset classes. Having lived through periods of high stock and bond price correlation, one can understand investor desire for “non-correlated” assets. That is, investments that tend to zig when others zag.
What follows is an investigation of the key drivers that may be leading to the Big Shift.
We begin our analysis by looking at current and historic price patterns. We then explore supply and demand fundamentals and review potential weather-related production issues. At a high level, we discuss geopolitics, a weakening US dollar, inflation on grain prices, and the potential diversification benefits of including grains in a portfolio. Finally, we conclude by relating our analysis back to the investor.
We hope you find this information interesting and valuable. Please do not hesitate to contact us with questions or ideas you would like to discuss.
On behalf of all of us at Teucrium, thank you for your continued interest in our funds.
We wish you a Merry Christmas, Happy Holidays, and a HAPPY NEW YEAR!
Prices Pointing to a Big Shift
Prices trend. When the price of an asset is rising, it is likely to continue rising for some period. Of course, the opposite is also true: when the price of an asset is declining, it will likely continue its decline for some period. The trick therefore is to identify, and determine the stage of, the prevailing trend. Identifying a price trend and trend stage is not easy to do. Even the best “trend followers” admit that it is an imperfect science.
Still, the recognition that prices trend, and the potential to accurately identify the trend, has captivated analysts and traders for centuries.[1]
Similar to the exercise of predicting short-term weather versus long-term climate patterns, it is difficult to predict a daily, weekly, or even monthly price move. However, it can be much easier to accurately forecast longer-range price trends.
For example, take the following one-year daily line chart on the S&P GSCI Grains Index. Notice that the line is squiggly, even jagged, in some instances on a shorter-term basis. It would be exceedingly difficult to predict the price movement on any given day. Yet when you take a longer-term perspective, you can see two very distinct trends that occurred over two separate (approximate) six-month periods. There is a downtrend that begins at the start of the year and an uptrend beginning in early August.
Chart 2
Chart created by Teucrium using Bloomberg Finance LP on 12/19/2020
S&P GSCI Grains Index
Daily Price Chart 12/31/2019–12/11/2020
Past performance is not indicative of future results
While the grain rally of 2020 has been impressive, it may prove to be nothing more than a short-term little shift in market sentiment. Evidence for the Big Shift must be derived from a longer-term analysis. For this we’ve examined the 20 year monthly price chart for the GSCI Grains Index.
Chart 3
Chart created by Teucrium using Bloomberg Finance LP on 12/19/2020
S&P GSCI Grains Index
Monthly Price Chart 12/31/2000–12/18/2020
Past performance is not indicative of future results
Chart 3 is a simple line chart showing the monthly closing price of the GSCI Grains Index over the last 20 years. Note the price spikes in the middle of the chart in 2008, 2011, and 2013. Those price rallies occurred during periods of tighter supplies resulting from decreased production or extraordinarily strong demand. Also, note the recent rally on the far right of the chart depicting the monthly price action for grains in 2020.
A quick glance reveals that the price advance appears to be coming off a price base that began in 2016. The recent highs also look to be testing price highs last seen in 2015. A test of the 2015 highs confirms that grain prices have moved to the upper end of their price range, but this alone is not confirmation of a Big Shift. A convincing monthly close above the 2015 highs, however, would be considered supporting evidence that the Big Shift is underway.
Additional context presents us with another view of the longer-term trend. Using the same monthly price chart, we’ve added a moving average line (yellow) as well as percentage bands to show when prices are 10% above or below the moving average.
Chart 4
Chart created by Teucrium using Bloomberg Finance LP on 12/22/2020
S&P GSCI Grains Index
Monthly Price Chart 12/31/2000–12/18/2020
With 14 period simple moving average & 10% Bands[2]
Past performance is not indicative of future results
Notice that the downtrend beginning in 2012 and identified by the moving average in 2013 continued through 2016. The moving average appears to have transitioned from a clear decline to a sideways pattern beginning in 2017. As grain prices advanced in 2020, the moving average has once again begun trending higher.
Moving averages are lagging indicators, and this positive trajectory does not confirm that a new uptrend is likely to continue. Still, market participants are likely to view this as a positive development.
Furthermore, prices are now more than 10% above the moving average for the first time since 2012.[3]The green arrows point to all periods since 2001 where this occurred. The chart shows that a break above this 10% line has historically preceded additional price appreciation without exception since 2001. Note too that a break below the 10% moving average band (red dotted line) has historically, but not always, preceded additional price declines. On both sides of the spectrum, about 50% of the moves above and below the 10% channel led to longer-term price rallies and longer-term price declines. The big question remains: where do we go from here?
Historical performance is not necessarily indicative of future results. Which way prices head from here is anyone’s guess. One thing is certain: the market will be keying in on supply and demand dynamics over the next year. The fundamentals, which we will review in Part II, will either confirm or dispel the theory of the Big Shift.
Stay tuned....
[1] Japanese grain traders were building candle stick price charts as early as the 18th century
[2] Simple arithmetic mean (average) of price over a rolling 14 month period. The green dotted line is drawn 10% above the moving average and the red dotted line is drawn 10% below the moving average.
[3] The green dotted line is drawn 10% above the moving average.