Commodity super-cycles do not occur often and are not associated with the business cycle; however, commodity cycles are arrested with a global downturn. The commodity super cycle is a general increase in commodity markets related to a combination of increased demand combined with supply shocks from weather and or under investment. Inflation periods may be associated with commodity super-cycles but are not a necessary condition as seen in 2002-08 period.
What we do know is that the gains in the BCOM commodity have been one of the strongest on record with an over 125% gain in two years. The current drawdown is only 15%, yet it is a meaningful correction. However, there were several 10% plus corrections during the great commodity bull cycle of the 2000's.
This correction will have an impact on PPI numbers and may dampen inflation. This correction will continue if central banks continue to raise rates. However, commodity declines have been linked with low rates, see 2011-2020 period.
For those who invested at the beginning of the Ukraine War, this feels more like a commodity bear market than a time of commodity shortage. Nevertheless, a reversal of the commodity bull cycle seems premature from a supply perspective. The oil and grain logistic problems from the Ukraine War have not been resolved.
However, the threat of a recession and a reduction in global growth is a reality. Demand destruction can significantly lower prices if a slowdown is on a global basis. A further decline that will result in a drawdown of 40-50% from the highs seen last month is possible when reviewing past declines during a recession.
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