After years of low prices and disappointing investment returns, there are signs that agriculture markets finally have real upside potential. Many of the headwinds that have pushed agriculture prices to multi-decade lows – good weather, lackluster demand, a strong dollar, and low inflation – are reversing course. Given the potential upside and exceptional diversification benefits that agriculture markets offer, it’s worth taking a closer look at these unique commodity markets today.

Investments in agriculture markets haven’t paid off

Recent years have been difficult for long positions in agriculture futures markets – there hasn’t been a supportive “bull story” on either side of global balance sheets. Global stockpiles of ag commodities have grown as South American acreage has exploded and crop genetics have improved. Farmers are growing more crops than ever before, and those crops are more durable. Demand for these commodities hasn’t kept up with growing supplies, so prices have dropped.

The Bloomberg Commodity Agriculture Subindex – a basket of nine liquid agriculture futures markets – has returned -5.3% on an annualized basis over the ten years ended September 30th. Meanwhile, the S&P 500 has returned +13.7% over the same period, US bond markets +3.6%, and US real estate +5.6%. Agriculture futures have shown exceptional diversification benefits to other asset classes – unfortunately, this is because ag prices have dropped while everything else has rallied. “Want to make a small fortune in ag markets?”, traders often quip, “Start with a large fortune.”