Agriculture index may be in early stages of next extended uptrend

SINCE hitting a high of 196 in July 2012, the Bloomberg Agriculture Subindex Total Return has been on a steep downtrend. Even today, the downtrend seems intact. However, we might be in the early stages of a monumental trend reversal as the agriculture index hit a low of 95.19 since December 2017. In total, the Bloomberg Agriculture Subindex fell 51 per cent through the past five years. The Bloomberg Agriculture Subindex is composed of Futures contracts on coffee, corn, cotton, soybeans, soybean oil, soybean meal, sugar and wheat.

Note that agriculture commodity moves in cycles with a clear defined timeline. A full cycle consists of a secular bull and bear market. For this study, we will use the cyclical bottom to mark the start of the cycle and the following cyclical bottom to mark the end of the full cycle.

Extended periods of uptrend will bring about a bear market while extended periods of downtrend will bring about a bull market as the demand and supply clears. With higher prices, more supply will come into the market thus causing the secular bear market to begin. On the other hand, the prolonged bear market will suppress price low enough to curb supply where demand outstrips supply, thus igniting the secular bull market.