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Page 1 of 2 Let's start with the obvious: 2008 was a difficult year for commodity investors. In fact, it was the worst year ever, with the S&P GSCI falling 42.35%. The horrible thing was that it all felt so good right up through summer. The S&P GSCI was up 41.42% at midyear, trading at all-time highs, before plunging 62% in six consecutive wrenching months of declines. There was almost nowhere to hide. Just two of the 24 commodities in the index delivered positive returns: cocoa and gold. By contrast, seven commodities fell more than 50%, led by lead, which tumbled 61.40%. And outside cocoa and gold, no other commodity did better than a -20% return. All these figures reflect excess returns, which combines spot returns with roll yield and reflects the experience of investors in this market. Importantly, however, excess returns overstate how bad things were from a spot price perspective. From a spot perspective, four commodities had positive returns in 2008: cocoa (30.96%), sugar (9.15), gold (5.53%) and lean hogs (5.18%). An additional five commodities had returns of less than -20%: live cattle (-10.55%), corn (-10.65), feeder cattle (-12.54%), coffee (-17.73%) and soybeans (-19.29%). The following figure shows how the spot returns differed from the excess returns. The difference between these two figures owes itself to the fact that all 24 commodities had negative roll yields for 2008, which contributed between 1.4% (nickel) and 38.3% (lean hogs) of negative return to the commodities market. The table below shows the spot, roll and excess returns for each of the commodities in 2008, sorted by the roll yield. Commodity | Roll Return | Spot Return | Excess Return | Nickel | -1.4% | -55.5% | -56.9% | Heating Oil | -1.6% | -45.6% | -47.2% | Silver | -2.3% | -24.3% | -26.6% | Zinc | -2.4% | -49.4% | -51.8% | Crude Oil | -2.6% | -53.5% | -56.1% | Soybeans | -3.1% | -19.3% | -22.3% | Gold | -3.2% | 5.5% | 2.4% | Unleaded Gasoline | -3.9% | -57.4% | -61.3% | Aluminum | -4.9% | -36.1% | -41.0% | Cocoa | -5.8% | 31.0% | 25.1% | Brent Crude | -6.0% | -47.9% | -53.9% | Kansas Wheat | -7.1% | -31.0% | -38.1% | Wheat | -8.5% | -31.0% | -39.4% | Feeder Cattle | -8.7% | -12.5% | -21.3% | Coffee | -9.5% | -17.7% | -27.3% | Natural Gas | -11.9% | -24.9% | -36.7% | Corn | -12.4% | -10.6% | -23.1% | Cotton | -15.7% | -27.9% | -43.6% | Live Cattle | -16.8% | -10.5% | -27.3% | Sugar | -30.3% | 9.1% | -21.1% | Lean Hogs | -38.3% | 5.2% | -33.1% |
The reason we write so much about contango is that it has an enormous impact on returns. For instance, a lot of investors (such as Jim Rogers) spent 2008 talking about the bullish outlook for sugar. Impressively enough, they were right: Sugar rose 9.1% in 2008 on a spot basis, despite global market conditions. But an investor in sugar lost 21.1% last year, because a vicious contango seriously impacted returns. A similar story was true of most Agricultural commodities. Although the markets were down in 2008 on a spot basis, they were not down as much as investors experienced – because the roll yield was nasty.
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