Kub's Den

There are seven trading sessions left in 2018, not to mention an interest rate announcement from the Federal Reserve, so by no means can we say we know the final results of this year's trading. However, we can look at various asset classes and see some messages about the global economy and how the investment universe has changed since this latest trip around the sun began.

Before I ran the numbers, if I'd been asked to guess which assets did the worst in 2018, I would have guessed soybeans and the stock market and gasoline. But I think that's only because those are the big "headline" assets that affect me directly when I deposit a check from the elevator, or look at my retirement account, or buy fuel at the gas station.

If I'd been asked which assets did the best, I might have correctly identified European wheat futures, but I don't think I would have guessed that corn futures had done eighth best out of a selection of 33 commodity markets. The corn market was one of a minority that posted an annual gain. The list of 33 commodity markets I considered is representative of the "investable universe" of commodity markets, and includes all of the assets within the S&P GSCI Index, plus a few more I selected for color and variety (like palladium, Malaysian palm oil, and oats). To keep things simple, I reviewed just the continuous front-month futures chart for each commodity market, looking at the change between the closing prices from Dec. 29, 2017, to Tuesday, Dec. 18, 2018.

Here are the winners and losers:

#1: Paris milling wheat +30.2%

#2: Chicago wheat +24.5%

#3: Oats +21.7%

#4: Kansas wheat +21.2%

#5: Natural gas +20.3%

#6: Cocoa +17.9%

#7: Palladium +12.9%

#8: Corn +9.9%

#9: Nickel +0.1%

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#10: Canola -0.1%

#11: Feeder cattle -0.2%

#12: Cotton -0.7%

#13: Soybean meal -0.7%

#14: Live cattle -3.1%

#15: Aluminum -3.2%

#16: Ethanol -4.3%

#17: Soybeans -4.4%

#18: Gold -4.8%

#19: Minneapolis wheat -5.7%

#20: Copper -5.8%

#21: Gasoil -10.9%

#22: Zinc -12.7%

#23: Hogs -13.3%

#24: Lead -13.3%

#25: Brent crude -13.8%

#26: Heating oil -13.9%

#27: Soybean oil -14.1%

#28: Silver -14.4%

#29: Malaysian palm oil -15.6%

#30: Sugar -17.6%

#31: WTI crude -21.1%

#32: RBOB gasoline -23.8%

#33: Coffee -25.0%

Some surprises in there! Who knew soybeans would actually be right in the middle of the commodity pack, damaged by the ongoing trade war, but not nearly as damaged by the global economic uncertainty as the energy sector commodities have been. The continuous front-month soybean chart fell from $9.51 3/4 per bushel at the close of last year's trade to $9.10 per bushel at the time of this writing. If we kept everything within one marketing timeframe and looked only at how Tuesday's nearby January futures contract has performed over the past year, we'd see a 73-cent drop from $9.83, or a 7.4% loss.

Obviously, past performance doesn't indicate future results. Looking at commodity markets' annual performance isn't like looking at the annual results from a hedge fund or mutual fund with active managers who might be expected to be similarly clever or similarly unwise investors from one year to the next. The circumstances that led to coffee's 25% drop or to wheat's price ascendancy -- notably, a summer drought in Europe -- are simply weather phenomena that may not repeat themselves. The punishingly low prices in the energy sector (WTI crude oil under $50 per barrel) could trigger production shutdowns, and eventually, an equally-dramatic price rally in the wake of this current collapse.

So we shouldn't look at this list of 2018's commodity winners and losers and draw any conclusions about what prices may do in the future. On the other hand, we might look closely and see some messages. Just how worried should we be about the global economy?

In the same way that agricultural traders sometimes refer to "King Corn," futures traders in the industrial metals sector also have a nickname for their biggest market: "Dr. Copper," who supposedly must have a PhD in economics because she is that good at indicating the overall direction of the economy.

So far in 2018, Dr. Copper has dropped 5.8%, bearishly, expressing a slowdown in industrial activity. Given that the U.S. stock market, represented by the S&P 500 Index, has fallen 4.1% so far this year (and it's down 12.9% since its Sept. 21 high), and the Chinese stock market, represented by the Shanghai Composite Index, has fallen 22.1% so far this year, it seems that Dr. Copper's prognostications are indeed backed up a broader reality.

King Corn has been insulated from all of that -- so far -- but whenever a market's customers, and its customers' customers, start to feel economic pain and uncertainty, then we know that the pain will eventually spread, even toward the throne.

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Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(AG/BAS)

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