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Jonathan Poyer

The Long and Short of Commodity Investing



We have supported the idea that owning commodities "long-only" in a portfolio is a mistake. The main thesis is that overtime, prices will come down either due to innovation or alternatives. Thus, we like having the flexibility to be long and short when it comes to commodity investing.


Our friends at Mt. Lucas are able to shed additional light on this idea in a recent post:



Let's see what they have to say:


The short side is too important to ignore. This can be true in financial crises like 2008/09 when crude oil dropped some 75%, but also in quieter times. The risk premium in Managed Futures comes from taking on risks producers and consumers want to shed, making participation on both the long side and short side necessary. Commodities are particularly useful as they are much less correlated to each other than something like bond markets. Crude oil, grains, softs and meats all have their own cycles driven by their own unique drivers and supply/demand curves. Current grain markets are a good example.


In 2022 grain markets spiked upwards as the Ukraine war directly impacted the wheat market. Prewar, Ukraine harvested some 33m tons of wheat as one of the larger global producers. Prices of US wheat had been trending higher through 2021 and were sitting around $8/bushel; by May they were 50% higher at $12/bushel. Wheat competes for acres with corn and soybeans, as farmers optimize a planting mix in part based on market prices. If wheat – which grows like a weed – is trading 50% higher than usual some acres shift to wheat and away from corn and soybeans, reducing expected crop sizes, pushing those prices higher. Long only caught that move.



The best cure for high prices though is high prices, and possible crop shortages and fears of the same can be solved with a couple of good harvests. As those fears and shortages abate, prices fall again. This is what we have seen in 2024.



Planting conditions were perfect, the growing season weather has been perfect. Seed technology and farming advances keep improving.



Record yields for corn and soybeans this year. What happens when high prices meet record yields? Lower prices. It’s times like these you need your shorts.


Diversification is very important for robust investing. Being able to invest on both sides of a trade through trend following managed futures might be a good way to take advantage of investing in items that are so important to human life and flourishing.





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