Todd's Take

Report Card Time

Todd Hultman
By  Todd Hultman , DTN Grains Analyst
Connect with Todd:
In a year that was mostly bearish for grain prices, spot Minneapolis wheat prices are on track for a 12% gain after drought hit the northwestern U.S. Plains. The big winners of 2017 were the S and P 500 Index, up 18%, and bitcoin, up over 21 times last year's price and not shown on the chart above. Source: DTN ProphetX. (DTN chart by Todd Hultman)

Ready or not, 2017 is just a few weeks away from flipping the calendar. I always find it interesting to step back and take a look at the winners and losers for the year. As we saw in last year's review, the exercise tells us something about the year we just came through, but it can also provide hints about what to expect ahead.

You may recall that 2016 saw more commodities with positive gains than the previous two years, and three of the top six leaders all had "oil" in their names: crude oil, palm oil and soybean oil. In 2017, crude oil was one of the top gainers for a second year after owning the bottom of the list in 2014 and 2015. This year, the bottom of the list belonged to palm oil with soybean oil third from the bottom and canola posting a small loss. As often happens when we look at these lists, winners and losers have a way of swapping positions over time.

The big winner in 2017 wouldn't normally be on a list of commodities or other investments, but priced at over $18,000 early Monday, bitcoin is up over 20 times its price from just one year ago and has overwhelmingly won the attention of the investment community.

Among more traditional investment choices, the S&P 500 futures index is up 18% from a year ago and outperformed all the commodities on our list. Typically, a stock market rising to new record highs and the excitement of a new soaring investment, like bitcoin, would leave commodities gasping for attention, but in general, commodities graded a C-plus in 2017 with nine of the 16 on our list showing positive gains.

As mentioned above, palm oil and soybean oil were among the biggest losers of 2017, as the end of El Nino brought a return of increased palm oil supplies. Traditional grains rounded out the bottom of the totem pole, as spot corn was down 2%, spot soybeans were down 4% and Chicago wheat was roughly unchanged from a year ago.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

Livestock, on the other hand, had a good year. Spot feeder cattle won the most improved award, rising from a 22% loss at bottom of the list in 2016 to second highest in 2017 with a 15% gain. Similarly, live cattle went from a 12% loss in 2016 to a 6% gain in 2017. Spot hog futures put in a second year of positive returns with a repeat of last year's 14% gain.

In last year's review, I mentioned 1985 research by economists Werner De Bondt of the University of Wisconsin-Madison, and Richard Thaler of the University of Chicago, which examined long-term stock returns and found that stocks that underperformed the averages in one three-year period tended to outperform the averages the next three years.*

Their work is another example of the market's balancing influence, which I wrote about last week and, I suspect, applies to markets in general. The fascinating point we can't ignore is that the group of stocks that performed the best probably also had the most bearish fundamental outlooks. By the way, this was the same Richard Thaler that won this year's Nobel Prize of Economic Sciences.

Because of the tendency for yesterday's winners to become tomorrow's losers and vice versa, I wondered aloud last year if winter wheat would see a decent rebound in 2017 and warned to watch out for a possible drop in soybean oil. Chicago and Kansas City wheat are still waiting for that rebound after respective increases of 0% and 4% in 2017, but soybean oil did fall 9% as warned.

Based on the same recurring tendencies, corn and soybeans are good candidates for a better performance in 2018, while lean hogs are due for a correction after two years of sizeable increases. I understand many fundamental analysts see little hope for grain prices in the year ahead, but keep in mind that the future is uncertain and the anticipated gloom, especially in corn and winter wheat, is largely reflected in current prices.

And what might be in store for the soaring stock market and bitcoin, 2017's star performer? Rising prices are powerfully seductive and no one knows how long these runs will last, but be aware that over 30 years ago a Nobel prize winner tried to warn us away from buying today's star performers.

* "Does The Stock Market Overreact?" by Werner F.M. De Bondt, Richard Thaler in The Journal of Finance, July, 1985, found at:

http://bit.ly/…

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

Follow Todd Hultman on Twitter @ToddHultman1

(BE/ES)

P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]
P[R1] D[300x250] M[300x250] OOP[F] ADUNIT[] T[]
P[R2] D[300x250] M[320x50] OOP[F] ADUNIT[] T[]
DIM[1x3] LBL[] SEL[] IDX[] TMPL[standalone] T[]
P[R3] D[300x250] M[0x0] OOP[F] ADUNIT[] T[]

Todd Hultman