Recessionary Commodities

March 12, 2009

Last week's interview with Tom Fernandes from GreenHaven Commodity Services pointed to a Yale study on recessionary commodities. We dig in...

  • The power of sugar
  • Signal value: How far are we though the recession?
  • The big caveat


Last week's interview with Tom Fernandes from GreenHaven Commodity Services pointed to a Yale study on recessionary commodities.

When we asked Mr. Fernandes how commodities can possibly be a good idea in this economy, he brought up a study published by Yale that is often used to justify commodity investments during boom and bust times. The study in question is a 2004 one by Gary Gorton of the University of Pennsylvania and K. Geert Rouwenhorst of the Yale School of Management titled "Facts and Fantasies About Commodity Futures."

The study discusses the performance of commodity futures over various phases of a business cycle - complete expansions and contractions (aka recessions) - using data spanning 1959 to 2004. Since we find ourselves in the contract-y bit (do we ever!), maybe we can look at the past not only for some opportunities, but for some hint of how much longer things may stay so dour.

One rather gigantic caveat: The study breaks the business cycle into early and late expansion, and early and late recession. These divisions are created by looking at the peaks and valleys of the data over time, and cannot be determined without seeing the next peak or valley - something that can only be done using hindsight. Back in December, economists told us that the current recession started back in December of 2007, but we have no way of knowing if we are in the early part or late part of that recession because we don't know how long it will last.


Winners And Losers

The authors created equal-weight commodity indices to compare how commodity futures performed throughout the business cycle.


Expansion Avg. Recession Avg.
Inflation 4.0% 6.5%
S 13.1% 1.7%
Corporate Bonds TR 7.2% 12.1%
Eq Wt Energy Futures 14.7% -0.8%
Eq Wt Industrial Metals Futures 18.4% 6.3%
Eq Wt Precious Metals 11.5% -8.7%
Eq Wt Animal Products 15.1% -7.7%
Eq Wt Other Food Futures 6.4% 20.3%
Eq Wt Grain and Products Futures 7.1% 0.4%


Looking at the table above, the clear winner in a recession is what the authors are calling Other Food Futures - which most of us refer to as "softs," meaning things like sugar, coffee and cocoa.

Sugar, in particular, is interesting because, while it's done well generally, it does exceptionally well during a recession. It puts a whole new light on Jim Rogers' love of sugar as an investment.


Expansion Avg. Recession Avg. Late Expansion
Sugar 6.5% 41.1% 11.0%
Early Expansion Early Recession Late Recession
Sugar 0.6% 54.3% 26.5%


The number that jumps out at me is the 54.3% gain that sugar has historically seen during the early stage of a recession. Compare that with what sugar has done since the "official" beginning of the current recession.


Sugar #11 (SB, ICE [NYBOT])

Sugar #11 (SB, ICE [NYBOT])


Looking at the monthly average prices for sugar in 12/07, prices ranged from a low of 9.66 cents to a high of 11.19 cents. Compare that with February 2009, when prices have ranged from 12.39 cents to 13.72 cents. If we compare the closing prices for those months, it looks like sugar has had a gain of 24.5%.

But it's not just sugar; it's all sorts of hard-to-invest-in commodities. Another commodity that performs similarly well in recessionary times historically is soybean oil - but not the beans themselves.

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