The demand woes led by the coronavirus outbreak and the oil market meltdown hurt the commodity market initially in 2020. However, broad commodities bounced back strongly recently on massive liquidity injections by central banks across the globe and optimism over the vaccines.

Commodity investors wager that crops, metals and oil will move northward this year, prompting combined bets on prices rising to the highest in at least a decade, per a Bloomberg article. In such a scenario, let’s find out which factors would favor the commodity market in 2021.

Soft U.S. Dollar is a Plus

The Fed has pledged to hold rates near zero and will continue the asset purchase program at the current rate until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. With several economic data including that of the labor market coming in downbeat of late, the Fed is likely to stay put this year.

Chicago Fed President Charles Evans recently said, it’s “probably going to be 2024 before we see interest rates start to rise,” per an article. Such a Fed move should keep the greenback subdued this year and boost the prices of commodities that are dominatedby the currency (read: Dollar Declines: What Awaits the Currency ETFs in 2021?).

Fiscal Stimulus

Since coronavirus worries are prevalent, major economies are still rolling out stimulus. In late December, Democratic and Republican leaders clinched an agreement on a new coronavirus relief deal worth around $900 billion that comprises a second round of stimulus checks and further unemployment benefits. However, with Democrats taking control over Senate now, the markets are betting big on a fatter stimulus. This means more consumption and faster economic growth as well as higher demand for commodities.

Moreover, president-elect Biden’s push for tax incentives will encourage domestic manufacturing. Biden’s campaign aimed to invest in restoring highways, roads and bridges, changing water pipes, building out rural broadband access, and updating schools among other works. Infrastructure fund should thus get a boost. If this happens, demand for materials should go up (read: 5 ETFs to Buy For the Blue Wave).

Vaccine Rollout to Boost Economy-Sensitive Materials

The start of vaccination will likely lead to faster-than-expected global economic recovery and boost demand for economically-sensitive materials, ranging from oil to copper. China-driven commodities’ super-cycle has started, switching on the country’s  buying mode again, per the Bloomberg article. Commodities like corn and copper are receiving an upward thrust due to China buying.

China is stocking up corn, having already purchased a record amount of the commodity, while soybean purchases are running at the quickest clip since 1991. Sugar has also set an upward journey, with Alvean, the world’s largest trader of the sweetener, foreseeing two years of shortfall ahead.

Copper an extremely sensitive metal to economic conditions, is now trading about 26% above its price a year ago and 72% higher than last year’s March bottom. Crude is also witnessing an uptrend mainly because of Saudi’s decision to cut production. Palladium should stage a rallyas stringent emission control norms have been fueling demand for the metal in the auto industry (read: What Lies Ahead of the Decade-Best Commodity ETF Palladium?).

Against this backdrop, below we highlight a few commodities ETFs that should stay strong in the near term.

Aberdeen Standard Physical Palladium Shares ETF PALL – Up 4% Past Month

Teucrium Corn ETF CORN – Up 19.6% Past Month

Teucrium Soybean ETF SOYB – Up 19.1% Past Month

iPath Series B Bloomberg Copper Subindex Total Return ETN JJC – Up 3.2% Past Month

United States Brent Oil ETF BNO – Up 11.4% Past Month

Teucrium Sugar ETF CANE – Up 10.9% Past Month

Aberdeen Standard Physical Silver Shares ETF SIVR – Up 6.8% Past Month

Caveat

China, the biggest consumer of metals and some agricultural items, has expanded lockdowns as coronavirus cases have surged and the first coronavirus death was reported in eight months following the occurrence of the new strain. If this spreads widely, the commodity rally may lose direction.

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