Did a Generational Bottom Occur in Agriculture During 2019?
There is perhaps no cheaper sector in the entire financial world right now other than agriculture. It seems like there are headlines on a weekly basis stating how terrible life has become for farmers and how it's all because of President Trump. But a quick glance at the DBA monthly chart below clearly shows that farming woes started way before Trump came into office. In fact, what the chart below doesn't show, is that agriculture prices peaked sometime in the 90s, not long after NAFTA was passed.
But the end of 2019 saw a fairly decent rally in agricultural commodities, and this fund closed higher 4 months in a row. Additionally, December saw DBA close at its highest monthly level of 2019, with the exception of January 2019.
If we zoom in a little closer and look at the weekly chart, we can see that DBA is trying to break out of a broadening bottom price pattern. While this past week saw DBA print a bearish engulfing candlestick, we have to look at the bigger picture and realize this fund has gone up for basically 4 months straight. If DBA can spend some time consolidating Q4 2019's gains, chances are we may have witnessed a generational bottom in agriculture.
This development comes off the back of the United States' recent "Phase 1" trade deal with China, where China apparently agreed to purchase ~$50 billion worth of agricultural products from American farmers.
Now this is where things get interesting: It seems that the U.S. is trying to get China to make up for their declining treasury purchases by buying agricultural products instead. The ramifications of this probably won't be felt in the short-term, but in the intermediate- or long-term, this is inflationary. If China is selling or reducing their treasury holdings, and then buying agriculture, this has a doubling-effect of producing inflation. Remember that interest rates are functions of inflation rates, so if China is increasing agricultural demand by purchasing large sums of product, then agricultural prices should rise together with interest rates.
From a geopolitical standpoint, one can see how China is trying to maneuver to attack the American economy and financial system. Rising interest rates would virtually break the back of the federal government's budget, and rising food prices would quite simply anger the American population.
I think you'd be hard pressed to find many people who think that the continued vertical integration of America's food supply over the past couple decades has been a net positive. One can see how this makes America susceptible to foreign interference in our daily livelihoods. Not only has the quality of food decreased tremendously in recent decades, but the prices paid at the grocery store haven't fallen in conjunction with agricultural prices. This simply means that food companies have seen their profits skyrocket, as their COGS have gone down, while their retail prices continue to climb. The solution to all of this is to grow your own food, and become as self-sufficient as possible.
A nation should only import that which it cannot produce itself.