Kub's Den

In April 2024, the stock market is going wild, swirling around fresh all-time highs, 20% above year-ago levels. Meanwhile, the yield on 10-year Treasury bonds remains above 4%, so the bond market, too, looks awfully attractive to investors. It seems the age-old question of "stocks versus bonds" has been renewed. If a person wants to invest their retirement savings in some financial asset, what should it be? "Safe" bonds that will pay them a known amount every year? Or something riskier that could, in theory, if all goes well and according to plan, earn them relatively more?

It all boils down to an investor's long-term expectations. A recent academic paper (https://www.tandfonline.com/…) by Edward F. McQuarrie caught my attention with its efforts to synthesize decades of past study and hundreds of years of historical data, hand-gathered from newspapers and magazines going back as far as 1793, to finally answer whether equities (stocks) really do pay a premium over bonds in the long run.

Here is McQuarrie's result: "The new historical record shows that over multi-decade periods, sometimes stocks outperformed bonds, sometimes bonds outperformed stocks and sometimes they performed about the same. New international data confirm this pattern. Asset returns in the U.S. in the 20th Century do not generalize. Regimes of asset outperformance come and go; sometimes there is an equity premium, sometimes not."

But since I live in a world surrounded by cattle and cornfields and tanks full of fertilizer and diesel fuel, I tend to think more about commodities than either stocks or bonds. These are all financial assets. Many commodity markets provide opportunities for a person to invest some money through a brokerage account. Or, if the person is a farmer, they have opportunities to invest their whole life and have a balance sheet producing and storing and trading commodities. So how do commodities, as a financial asset, compare in this very long-term investment perspective?

The first thing we must recognize is the problem of very small sample sizes. Soybean futures, for instance, have only traded at the Chicago Board of Trade since 1932, so if we wanted to examine what happens to that market over, say, 50 years at a time, we wouldn't yet have even two unique samples to study. For some commodities, however, the data exists!

One of the most treasured books on my bookshelf is a little pamphlet I picked up at a thrift store titled, "The Amber Waves of History: 200 Years of Grain Prices," written by Hugh Ulrich and published by Commodity Research Bureau in 1996. It goes through the fascinating history of how international grain trading developed during the Industrial Revolution, how Napoleon Bonaparte's attempts to conquer continental Europe influenced the geographical shift of grain production toward the Black Sea, and how the first global benchmark prices were established at England's Liverpool Corn Exchange. Ulrich assembled a chart of annual average wheat prices in England, going back as far as 1750, and wrote: "The 1800s start off with a bang, a series of gigantic price spikes caused by the Napoleonic Wars. The first, in 1801, took wheat to $3.63 per bushel in England. This peak was eclipsed in 1812, with a price of $3.85, a level not reached in Chicago for another 162 years!"

So, we do have a good long historical record of global benchmark wheat prices to study in comparison to stocks and bonds. Even within the United States, the Chicago Soft Red Winter Wheat futures contract has been trading since 1877. If studying historical prices like these fascinates you too, I can also point you toward Dr. Scott Irwin's curated collection (https://scotthirwin.com/… of historical wheat price studies.

Those price spikes from the Napoleonic Wars and the Crimean War tell us something important about commodity markets. The lesson is also emphasized by more recent research (https://www.sciencedirect.com/…) into historical wheat price volatility regimes, which found we're currently living in the period with "by far" the largest daily wheat price volatility of any timeframe in the past 140 years. The lesson is this: commodity prices go up, and they also go back down. These markets are not well suited to be long-term buy-and-hold investments. Anyone with a bin full of $3.85 wheat harvested in 1812 would have had to wait a very long time to see any positive return, longer than that person would have been alive. There is simply no expectation for a commodity investment to pay a steady annual return, as a bond would do, or to necessarily grow in value over time, as equity in a well-run business ought to do. And in the meantime, any buy-and-hold investment in a commodity market is subject to extraordinary volatility, i.e. risk.

Still, if we picked a certain chunk of time and evaluated a commodity investment compared to stocks or bonds, would the commodity market outperform? The long run of history shows the answer is sometimes yes and sometimes no.

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Further reading:

McQuarrie, E. F. 2023. "Stocks for the Long Run? Sometimes Yes, Sometimes No." Financial Analysts Journal: https://doi.org/…

Haase, M., H. Zimmermann, and M. Huss. 2023. "Wheat price volatility regimes over 140 years: An analysis of daily price ranges." Journal of Commodity Markets: https://doi.org/…

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at analysis@elainekub.com or on X, formerly known as Twitter, @elainekub.

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