Todd's Take

"So the last shall be first, and the first last: For many be called, but few chosen." Matthew 20:16, KJV.

Forgive me for putting sacred words in a space where we talk about earthly things like corn and hog prices. I am pretty sure the writer wasn't referring to anything as profane as commodity markets at the time, but I have to appreciate how this bit of ancient wisdom applies to how well or poorly commodities perform from one year to the next.

This is the third consecutive year of looking at year-end gains and losses of various asset prices that pertain to agriculture, and I continue to be fascinated by the results. The real value in this exercise is that it reminds us again about the invisible power of regression at work in markets.

As I have described before, there is academic research behind the tendency of last year's losers to become this year's winners (see the previous article, "Commodity Price Clues for 2019" at:

https://www.dtnpf.com/…). Or perhaps we're content with familiar sayings like "What goes up must come down" or the biblical text cited above.

However you want to understand the tendency of market prices to overshoot in good years and bad is up to you. The main point is that they often do, regardless of what market pundits expect.

More clear examples of this in 2019 included spot futures prices of crude oil and palm oil. Both were the biggest losers of 2018 with year-end losses of 22% and 18%, respectively.

As of Dec. 18, 2019, spot palm oil ranked No. 1 among 17 commodities with a gain of 36% over the past 52 weeks. Crude oil followed in second with a gain of 34%.

Soybean oil was the third-worst performer of 2018 and is currently showing a 21% gain, helped by palm oil's coattails and this year's lower world vegetable oil surplus. Lean hogs were the fourth-worst-performing commodity in 2018, and are now showing a 15% gain on the year, getting help from African swine fever.

How about the winners of 2018: How did they do? Chicago wheat led last year's group of 17 and turned in a decent performance again this year. Chicago wheat is showing a 7% gain over the past 52 weeks and ranks eighth, roughly in the middle of this year's pack.

KC wheat had the second-best performance in 2018, but fell to the bottom of the list in 2019 with a current loss of 8%. Oats, on the other hand, had the third-best performance in 2018 and is doing well in 2019 again with an 8% gain, sitting in seventh place.

In case you're wondering if I'm cherry-picking the best examples to make a point, I do have some research to share. Going back 23 years to 1996 in the same 17 commodities, the No. 1 performer of each year showed an average loss of 7.4% the following year. The worst performer, on the other hand, showed an average gain of 13.3% the following year. In fact, the second-, third- and fourth-worst performers also show average positive gains the following year.

When I consider all the effort and work many of us do to try to predict where prices will trade in the year ahead, it makes me smile to think of this ancient tendency that so many ignore.

With research and wisdom in hand, but offering no guarantees, four markets with bullish potential in 2020 are KC wheat, cotton, Minneapolis wheat and soybean meal. Four markets to watch out for are palm oil, crude oil, soybean oil and one financial asset -- the stock market.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/AG)

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