Agcapita

Commodities Boom and Rotation

The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research from Agcapita Partners LP (Calgary Canada private equity firm) shows that investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market/high inflation period in the 1970s equities materially underperformed farmland. The S&P 500 index returned less than 2% per year nominal (negative 50% in inflation adjusted terms), funds in a money market account returned 6% in inflation adjusted terms (barely staying ahead of inflation over 10 years) while western Canadian farmland went from around $100/acre to $550/acre (550% nominal return, 176% in inflation adjusted terms).

The world is still in the early stages of the current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further price increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981