Are We in the Early Innings of A Commodity Super Cycle?

 In the last 120 years, there have been five instances where commodity prices have rallied for a period of 10 years following a trough in commodity prices.  Is this the next Super Cycle?





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 Ryan Katz is a Registered Representative of Alps Distributors, Inc.

ALPS Distributors, Inc. is not affiliated with USCF Investments or SummerHaven Investment Management, member FINRA.

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Transcript

Are We In The Early Innings of A Commodity Super Cycle?
Season 3: Episode 6

Katz: Welcome to the Real Spiel with Ryan and Kurt. Let's talk about where we are in this commodity price rally. SummerHaven has published commodities and inflation research with data going back over one 120 years. And in that time, they've been five periods where commodity prices have rallied for roughly a decade at a time. Investors sometimes refer to these commodity price, prolonged commodity price rallies as super cycles. As we know, commodity prices have rallied over 70% since the pandemic lows in 2020. Kurt, are we in the early innings of the next commodity super cycle? 

 Nelson: Hey Ryan, I think it's too early to know. But what we have seen in the last two years totally fits the pattern. So, as you said, we've looked at data exchange traded futures prices going back to 1900. I think the term super cycle is often used in the media or by Wall Street research firms but tends to not be very well defined. What we looked for were patterns of multi-year, persistent periods of price appreciation in commodity prices and were able to find five of those. One was 1900, another was 1914, 1941 at the onset of the World War II. We saw 1971, famously, you know, the seventies, stagflation story. There was another cycle starting in 1999 kind of towards the tail end of the Internet technology boom and the NASDAQ. And then the question is, did a cycle start in 2021, you know, going back a couple of years? 

 One of the things that I would share is that each of the five specific commodity, super cycles if you will that we identified was preceded by a significant drawdown in commodity prices in the few years prior. And those kind of peak drawdowns and prices that weak periods of commodity prices tended to be down thirty to down fifty percent, the one preceding 2021 down fifty one percent. We think that's an important setup for a commodity super cycle, because it’s usually preceded by this period of prolonged period of low prices, weak demand, and the producers, the mining companies, the energy companies, agricultural firms are really playing defense. They're not expanding capital expenditures. They’re not opening new mines doing new exploration, they’re playing defense and they're trying to survive this cycle of lower prices. But that means when things revert and they come back, there is a lag for supply to be able to meet this new demand. And so, you're persistently under supplied you know, as you're increasing supply demand, it's going up equally as fast. And the only thing that can give when that happens is prices. So, we have seen that peak drawdown. Prior to 2021, it's very similar to what we've seen in the past.  And we certainly have seen a significant rally in commodities over the last two years. When every other asset class you know was challenged since ‘21? 

Katz: Absolutely. Can you talk a little bit about stocks and bonds and how they do during these super cycles? 

 Nelson: Sure. I mentioned the kind of five starting points for these cycles. And they ranged from seven to eleven years, an average of a little more than nine years in length. First let me just mention the returns to commodities. So, adjusted for inflation, these are risk premium or excess returns after you account for inflation. They range from a low of twelve percent to a high of twenty percent per annum throughout the entire cycle, the average for commodities. Actually no.   I take that back, the 1914 cycle was shorter, but actually had thirty one percent per year price appreciation after inflation in commodities. The average over these five was about twenty percent per year. So very significant. The average return to stocks was about three and a half percent per year above inflation. The average returns for bonds interestingly was even negative is about minus point two. So close to zero. Essentially you're not getting compensated. These periods are very coincident with inflation and inflation tends to be a very challenging environment for stocks and a very painful environment for bonds as interest rates are typically going higher and higher. So, I think stocks and bonds are really not a great place to hide should we be entering into a prolonged super cycle.

Katz: Sure, and most investors assets are invested heavily in some sort of equities or fixed income. If we are in the early stages of commodity super cycle, you're saying the evidence seems to suggest that those asset classes are going to underperform for several years. SummerHaven is an institutional commodity manager. Are you seeing, you know, more interest from institutions at this point?

Nelson: We are, actually just in the last, you know, three months or so. We're having or just a reverse inquiry where people are that are familiar with us or just reaching out and saying this is on our plate now we have to deal with this. And we've also been proactively reaching out to people trying to spread our message and our research. And that's led to a number of meetings just very recently, remember we. You know, we we've finished ‘22. So people are kind of locking in their annual returns. And they're seeing pain across the spectrum. You know, for two years if you look at the average returns to equities or bonds or even things like real estate measured through REITS. Or even gold. it's been very difficult to find a performing diversifying asset and commodities have been that. So, interest his has grown rapidly. I still think the asset class is very under-represented in portfolios. So, I think if this is the beginning of a commodity super cycle, I think it will be the beginning of a significantly growing portion of commodities in investor portfolios. And that's just beginning now.

Katz: Any topics you'd like to hear us discuss? Please reach out to us at TheRealSpiel@USCFInvestments.com.  Thank you for tuning in. We'll talk to you next week.