Looking at prices and revenue, it was a good year to be a commodity producer or a long commodity investor! For the calendar year 2021, agricultural commodity futures have posted the following gains (prices rounded, as of Dec. 28, 2021):
Corn: Up 26% from $4.84 to $6.10
Soybeans: Up 3% from $13.15 to $13.60
Soybean meal: Down 4% from $434 to $417
Soybean oil: Up 33% from $0.43 to $0.57
Wheat: Up 23% from $6.40 to $7.90
Oats: Up 94% from $3.60 to $7.00
Canola: Up 62% from C$629 to C$1,020
Cotton: Up 41% from $0.78 to $1.10
Live cattle: Up 21% from $113 to $137
Feeder cattle: Up 17% from $139 to $163
Hogs: Up 19% from $70 to $83
Pork cutout: Up 18% from $79 to $93
In other interesting commodity markets, these were the gains:
Crude oil: Up 54% from $48 to $75
Ethanol: Up 47% from $1.43 to $2.10
Natural gas: Up 57% from $2.54 to $4.00
Copper: Up 25% from $3.51 to $4.40
Random length lumber: Up 31% from $873 to $1,140
This is the time of year when we not only reflect on the past, but also anticipate what may happen in the fresh new year. Will owning commodities continue to be so rewarding in 2022?
Investing your capital in some assets gives an expectation of relatively steady returns, for example: dividend-paying stocks that pay you back 2%, let's say, of your capital in cash dividends through a year. Coupon-paying bonds also promise to send their investors cash at regular intervals. Real estate investments generally involve receiving some rent payments as regularly scheduled income. Even non-dividend-paying stocks have an underlying expectation that the company will grow, and the value of an investor's capital will grow with it.
Commodities don't work that way.
History shows a long series of commodity booms and busts because prices are set not by the expectations of a future stream of cash flows, but instead by the scarcity or abundance of the physical stuff -- the supply and demand. Supply can be especially unpredictable for agricultural commodities, which are generally grown only once a year in either hemisphere, influenced by wild weather and the totally unknown shifts in ocean current temperatures, and prices are eventually driven down toward the most efficient cost of production, because thousands of individual producers are, in effect, constantly competing with each other to become the low-cost provider to the world. So, looking at the annual returns for commodity markets, they tend to be either the most profitable speculative assets to hold through a year or they post the steepest, most volatile losses. They're rarely steady and stable in the middle, relative to more traditional investments in stocks and bonds, and they tend to display wild whiplash between big gains one year and big losses the next.
This isn't to say that multiple strong years in a row have never been observed or could never happen in the future. Consider oil prices dropping 46% in 2014 then another 30% in 2015. Or, in the other extreme, consider corn prices rising 25% through 2020, then tacking on another 26% this year. There are bullish reasons why global corn, soybean, wheat prices could continue to gain in 2022, including hot and dry conditions in South America right now when their annual grain-growing season is at a critical phase. Add in strong domestic processing profitability and demand, plus an overall inflationary environment where prices for every raw material seem to be churning higher month by month, and I don't think we should look at 2021's boom as an automatic reason to assume 2022 will be a bust.
However, before we get lulled into a sense of unwarranted bullish confidence, it may be useful to look at an illustration of how rare it is for one single asset to post the best relative performance in the investment universe for multiple years in a row. "Winners" never seem to stay on top for long. Since 1999, the investment consulting firm Callan has been publishing a "Periodic Table of Investment Returns" (https://www.callan.com/…) showing the gains and losses of various investment assets, in order, year by year, which visually drives home the importance of diversification across asset classes.
Picking just one investment and holding it for years on end will never be the best option, year in and year out. As Callan explains, "Rankings change every year. Also noteworthy is the difference between absolute and relative performance, as returns for the top-performing asset class span a wide range over the past 20 years."
I've taken the idea of a periodic table and built a similar illustration to include the annual performances of a few commodities over the past 10 years. What strikes me is that the commodities tend to be scattered at either the high or the low end of returns, and it's nearly impossible to predict which asset class will be the best performer from one year to the next, so diversification among multiple investments would make more long-term sense than trying to chase returns.
That's a fairly easy prescription for stock market investors to implement in their retirement portfolios, and those are generally the people for whom such a periodic table of investment returns is created. It's much less simple for agricultural producers whose very line of business involves unavoidable absolute exposure to volatile commodity markets. Even though it's not simple, I felt it was important, after the year we've had, to once again emphasize this point: it's futile to expect big, favorable gains in grain prices year in and year out for many years in a row. Therefore, producers should regularly examine how dependent their business (or their household) is on commodity income and what other diversified sources of income might stabilize that effect over time. Build a strategy to celebrate the good years by reinvesting in future opportunities, because we can never predict with perfect foresight who next year's winners will be.
Best wishes for a profitable 2022!
Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at [email protected] or on Twitter @elainekub.
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