The first half of 2021 brought a series of historical financial events. An epic rally in cryptocurrencies, a more-than-25-percent spike in crude oil, and exploding ag futures prices made headlines as traders evaluated the current state of the world. Ultimately, one market driver can be tied to each of these phenomena: a sluggish U.S. dollar (USD).
The Lagging Greenback
During the March 2020 onset of COVID-19, it quickly became obvious that the U.S. Federal Reserve (Fed) and the U.S. government were going to spare no expense in fighting economic fallout. The Fed adopted a policy of unlimited QE, and the federal government injected trillions of dollars in direct stimulus into the economy. The results were a 12-month restoration of industrial growth, a lagging USD, and an explosive 2021 ag futures bull market.
During the initial stages of the COVID-19 pandemic, the USD became a safe-haven asset and was bid to multi-decade highs. However, by late May 2020, the shine was off the greenback. In roughly 12 months (May 2020 to May 2021), the USD Index plummeted from 99.52 to 90.26—a loss of 9.3 percent. One thing appeared certain: Inflation was on the way. And, by late spring 2021, the USD saw a marked decrease in its purchasing power:
- April’s core personal consumption expenditures (PCE) rose 3.1 percent year-over-year.
- April’s consumer price index (CPI) rose to 4.2 percent, outperforming consensus expectations of 3.6 percent. This figure was the fastest CPI leap since 2008.
When April’s inflation data was released, the Fed stated that the uptick was temporary. Accordingly, QE unlimited’s 0.0 percent to 0.25 percent federal funds rate and $120 billion in monthly debt purchases were to remain intact. As a result, early June readings of the CME FedWatch Index estimated the likelihood of a ¼-point rate hike by year-end 2021 to stand at 7 percent. This figure was down from the 14 percent projection made one month earlier, just ahead of April’s inflation data releases.
Are Ag Futures Headed Higher in H2 2021?
As a general rule, a fading greenback is a bullish underpinning of the ag futures markets. This was certainly the case through the first half of 2021, as several CME ag contracts reached lofty heights. Here’s a brief look at the key moves from Jan. 4, 2021 to June 1, 2021:
- 2021 December CME corn futures (ZC) rallied from 435’2 to 558’2 (+28.26 percent). The May spike in corn brought the highest prices in nearly a decade.
- 2021 November CME soybean futures (ZS) moved from 1117’2 to 1387’6 (+24.2 percent). This rally extended soybean prices to the highest since 2012.
- 2021 December CME live cattle futures (LE) rallied from 120.05 to 126.25 (+5.1 percent).
- 2021 December CME lean hog futures (HE) moved from 65.725 to 83.975 (+27.7 percent).
As you can see, H1 2021 was extremely bullish for ag futures. Prices rallied across the board, extending the sharp gains of late 2020. Will the second half of 2021 be any different? Not likely. Ag commodities are poised to continue their uptrend for two primary reasons:
- Inflation: As of this writing, the Fed remains committed to its policy of unlimited QE. Economists aren’t anticipating any debt purchase tapering until 2022 or interest rate hikes until late 2022. Subsequently, the Fed is in position to let inflation run significantly above the 2 percent average benchmark for an extended period.
- COVID-19: The introduction of vaccines has brought optimism toward a full post-COVID-19 economic reopening. If such an event does occur, then demand for energy and ag products is likely to surge.
In short, the combination of inflation and a post-COVID-19 reopening will place pressure on commodities. Higher fuel costs will also contribute to rising ag futures prices, as operational expenditures for producers are poised to rise substantially. For the back half of 2021, it appears that grains, oilseeds, and livestock are headed higher.
Maximize Your Market Share
Without question, 2021 is turning out to be one of the most complex financial years on record. If you’re interested in becoming active during this exciting time, then ag futures are worth a look.
To learn more about how to maximize your profitability while limiting risk, check out Daniels Trading’s e-book The Ultimate Guide to Hedging. In it, you’ll find valuable insights into how to build a rock-solid ag trading and marketing plan.