Supercycle Lessons from History





Source: Stifel Report June 2020. Note: Shown as 10yr rolling compound growth rate with polynomial trend at tops and bottoms. Blue dotted line illustrates a forecast estimation. Source: Warren & Pearson Commodity Index (1795-1912), WPI Commodities (1913-1925), equal-weighted (1/3rd ea.) PPI Energy, PPI Farm Products and PPI Metals (Ferrous and Non-Ferrous) ex-precious metals (1926-1956), Refinitiv Equal Weight (CCI) Index (1956-1994), and Refinitiv Core Commodity CRB Index (1994 to present).



In 1948, Winston Churchill stood before the House of Commons and paraphrased George Santayana with these now famous words: “Those who fail to learn from history are doomed to repeat it.” Over our next few posts we are heeding Churchill’s warning, and taking a lesson from the history of commodities.



In the first few years of the 19th century, the Napoleonic Wars were being waged across Europe as the United States was pulled into its own conflict with Great Britain. Ludwig Van Beethoven was busy composing some of his most treasured works. In the 18 years between 1794 and 1812, another important though lesser known event transpired: the price of corn across Europe tripled, making land owners wealthier than they ever had been. Other commodities also rose at a staggering rate.



Then in the decade that followed, prices fell back to their original 1794 price of 45 shillings per quarter. Governments tried to prevent crashing prices with tariffs and laws like the Corn Laws, which banned imports when the price was below 80 shillings, but nothing could stop the world economy from heading into a depression. It would take 52 years and the United States Civil War to bring the price of these commodities full circle. Only for them to crash back down again.



As we watch the price of corn trend upward for the 7th month in a row, we’re reminded of the trend known as the commodity supercycle. This decades-long, above-trend movement in commodity prices results from structural changes in demand. The chart above shows 6 commodity supercycles since 1805, with each one lasting approximately 25-35 years. Each one tells another story from the history books, as the latest surge in global capital sought to instill a new balance between stability and growth.



Between Goldman Sachs, JP Morgan, The Economist, S&P and Business Insider, the media has been abuzz speculating as to whether we are now experiencing the dawn of a commodity supercycle. Has the pandemic triggered this latest repetition of history? Money is readily available as governments have invested in production, pushing for massive changes in manufacturing and industrial processes. If we look at the historical precedent, the prerequisites certainly seem to align.



As we zoom in on the world of animal feed ingredients, we see that corn derived products like Amino Acids are in extreme short supply with Chinese producers preferring to sell in the mainland to avoid the difficulties of securing shipping. The changing face of global demand is really the big outstanding question when it comes to evaluating whether we are on the verge of another supercycle. Are we seeing real structural change or a mere reaction to global supply availability? This is the missing piece of the puzzle, one which we’ll explore further next week.

Next week: Supercycle or Superbubble?