After Seven Months of Consolidation Food Prices are Starting to Resume their Advance

The Invesco DB Agricultural Fund (DBA) consists of grains (37%), softs (sugar, coffee and cocoa; 35%) and livestock (24%). A small allocation is also given to cotton. Chart 1 shows that this ETF began a bull market back in the spring of last year. Late 2020 also saw it break above the green down trendline; that line represented the upper part of a broadening wedge. These formations, when completed, are particularly bullish, as they are often followed by a powerful advance.

The reason probably lies in the fact that short sellers become more and more emboldened as the price works its way progressively lower. That process has been flagged by the lower trendline of the formation. By the same token, each new low takes out more and more discouraged longs. The transfer of the security in question to more resilient hands and the build up in short positions  results in a strong technical position. As prices start to rally, more and more participants begin realize that they are on the wrong side of the market. That realization is a key factor in fueling  the advance. Following a strong rally off the March 2020 bottom, the price began to consolidate in May. Now the consolidation, in the form of an upward-sloping inverse head-and-shoulders, is giving way to an upside breakout. This is shown in greater detail in Chart 2.

The breakout looks genuine because the Goldman Sachs Agricultural Index (Chart 3), which is weighted slightly differently, is also experiencing one. Further examination of several agricultural sub indexes and their components suggests that this recent strength is broadly-based.

Grains

Chart 4 features the three principal grains: corn, soybeans and wheat. The latter has broken out decisively whilst corn and soybeans have experienced a tentative break. The soybean price is of particular interest since it is also edging above its 10-week MA, which also adds to the significance of the resistance when decisively surpassed.

Softs

Chart 5 indicates that the Bloomberg Soft Commodity Sub Index (JJS) is in a firm uptrend. However, coffee, one of its principal components, is likely to give it an additional boost, as it has just broken out from a consolidation right-angled triangle formation (Chart 7).

Livestock

The Bloomberg Livestock ETN (COW) is trying to edge through its 2019-2021 down trendline. It's a pretty significant one, not only due to its length but aslso from the number of times it has been touched or approached. The line is also in the area of its 65-week EMA, which adds to the importance of this resistance. If the price is able to more decisively push through this resistance, it is very likely to move much higher. The two KSTs are also supporting the probability of a stronger breakout materializing, as both are above their respective EMAs and are by no means overextended.

Conclusion

After several months of consolidation, the DBA has broken to the upside. Not all of its components have followed with breakouts of their own. However, there are enough to suggest that the next leg of the agricultural commodity bull market is already underway. Soybeans and the livestock area are two worth watching in that regard, as are the prices in your local supermarket!

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.