The evidence is mounting daily that the down cycle for many commodities is well underway. The question on many inquiring minds is, “How long and how deep will this cycle be?” The longevity and severity of the cycle will be dependent on the convergence of factors similar to the period from 2013 to 2020. In that era, prices adjusted downward very quickly, but costs and interest rates were either modest at that time or had not increased.

Export markets

One critical factor affecting commodity prices is the strength of the export markets. One in five dollars of net farm income is generated by sales outside of the United States. The status of sanctions and tariffs on agricultural products can be impacted by counter tariffs on technology and manufactured goods by the importing countries.

The economic health of major trading partners such as Canada, Mexico, China, Japan, and others is an important consideration for export markets. Canada is in an economic slowdown while Mexico has modest to slow growth. The Chinese economy is being impacted by their demographics and aging population. Slow retail and consumer demand is caused by a decline in China’s housing and equity markets. This loss of paper wealth is being reflected in the reduced consumption patterns throughout China.

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Currency values

The value of the U.S. dollar relative to the currencies of our trading partners is a variable that needs to be considered. The strong dollar is resulting in U.S. commodities being more expensive in the global marketplace. As interest rates decline, watch how it ripples through into currency values.

The weather

Keep a close eye on weather conditions over the next few months in the production belts of the U.S. during harvest and in the Southern Hemisphere during spring planting season. The weather will have short-term implications in the marketplace. Extreme weather such as extended dry periods followed by intense rainfall during critical periods of commodity production and distribution will need to be carefully considered both in pricing and input decisions.

The U.S. has been asleep at the wheel concerning competition. Since 2013, China and other nations have been very strategic in their investment in the Belt and Road Initiative. These investments allow traders to competitively seek commodities throughout the Southern Hemisphere for not only their own country, but the whole Asian region. The infrastructure development and the advancement of alternate currencies to compete against the U.S. dollar’s dominance could impact trade and needs to be considered for the longer term.

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Keep in mind

The following are some additional points to consider about the cycle's longevity.