Give a choice, humans would like to erase the down part of the cycle. Living with an upcycle is convenient. But the balance of nature is very intricate, and we as masses don’t understand it. This is why it is hard to appreciate growth and decay in markets. What we accept as natural, we fail to relate to in our economic life. Why this disconnect?
There are few reasons. First, we think we are too important, maybe more important than nature. Second, our knowledge is limited. Third, we are emotional, self-involved, overconfident, and shortsighted. So understanding large down cycles is simply incomprehensible. The connections between nature, market behavior, and economics have been written for decades. The Nile flood – drought cycles fluctuated every 18.6 years. The behavior had a strict periodicity to be just a random chance. But the cycle ended after a dam was built on the river. The river Nile cycle might have harnessed by human ingenuity, but there are many cycles beyond our reach. And even the best efforts of man can just delay them, marginally. We attempt to push out the decaying cycle, sometimes wishfully, out of our life, but then the cycle exerts itself and overpowers us.
Food cycles have been linked with drought and flood cycles for a long time. Based on data collected from 1680 till 1790, Duvick and Blasing (1981) concluded that droughts are cyclical and may occur twice per century. Studies have also proved how food cycles are linked to weather and climate cycles, which in turn have a strong connection with sunspot cycles. Sunspot cyclicality has witnessed a periodicity of 9.3 years. The activity has been monitored for 400 years. And it was an economist William Stanley Jevons who first suggested that there is a relationship between sunspots and crises in business cycles. He reasoned that sunspots affect the earth’s weather, which in turn, influences crop yields and, therefore, the economy. Since 1991, the Royal Observatory of Belgium keeps track of sunspots as the World data center for the Sunspot Index.
And evidence continues to mount that the most significant changes in the earth’s climate can be traced to the effects of solar activity. To illustrate sunspot numbers were plotted along with the levels of Lake Michigan and Huron. A correlation was seen between sunspots and lake levels. Climatologists have long found a connection between solar activity and climate. And if the sunspot cycle is fairly predictable, climate cycles must be for real and if that’s true, we have a base for explaining Agricultural cycles and agricultural commodity prices.
But we as humans give less weightage to simple observations. Markets look at myriad factors in the grain and bean complex rather than a single cause. These factors include production techniques, government policies, changing demand patterns, and worldwide politics. But it’s the weather and climate change, which are the most important. Cycles are average periodicities found in historical data. Often these occurrences were either longer or shorter than average. The more consistent the cycle, the closer all occurrences come to the ideal period. Understanding agricultural cycles and the factors contributing to high and low can help an investor or farmer understand how favorable weather can enhance production leading to a drop in prices and vice versa.
And apart from the large 50-year drought cycles, cyclists have studied short-term cycles in agro commodities. There are 39- 44 month soybean cycles. Some other interesting aspects are that major bull markets in corn and beans don’t come more than 48 months apart. Rises in beans generally take over three years with the first year rise of around 25%. Soybeans exhibit 18-year cycle bottoms. Four good growing seasons are rare. And links have been even seen in volcanic and agricultural cycles of 9.3 years, which also are seen in sunspot cycles. This all might look strange, but the complexity has an order.
Sugar cycles can be explained from a market sentiment point of view. If we take the S&P sugar Index, historically the Index has underperformed both DOW and the Indian Sensex. But sugar started outperforming DOW and Sensex from May 2007 and Oct 2007 respectively. A positive society tends to be happy and health-conscious. This is the reason rising equity and secular uptrend generally sees a fall in sugar consumption and vice versa.
Building on the case of food cycles, Intermarket ratios also highlight underperformance and performance cycles. S&P agricultural index, a composite of all agricultural commodities has been underperforming DOW since 1974. And just like Sugar, the composite index has started outperforming Dow in May 2007. Since 1975 the agricultural composite has underperformed the CRB commodity index, suggesting that agricultural commodities performed the worst among commodities are were out of favor for investors. This too seems to change, as the agricultural complex starts to deliver. Agricultural commodities have caught up with alternative energy index NEX and are now at parity with alternative energy performance. But compared to Oil and Gold, agricultural commodities continue to give a subdued performance. Agricultural commodities have underperformed Gold and Oil since 1999 and 1970s respectively.
On the price-performance basis through agro prices are off their historical highs with Wheat down 40% (Since Feb 2006), Sugar down 35% (since Feb 2006), Cocoa down 16% (since Jul 2008), Cotton falling since 1995 (down 87%), Corn down 31% (Since Jun 2008) and even Coffee, which we gave a positive view in March 2007 (after which it turned up 60% from sub 100 levels to 160) has also retraced 20% from its historical (since Feb 2008). But despite these down moves agricultural commodities have weathered the equity recession and the composite agro index is already positive for the year. This was owing to the recovery in Sugar, Cocoa, Corn, and Soya. This means two things, first that the food crisis maybe far from over, and second agricultural commodities remain an outperforming asset as the agricultural cycles start to look up. Another reason for agricultural complex outperformance might also be the bottoming 9-year sunspot cycle, a strange fundamental cycle, we might never understand, just experience.