Study warns against long-term commodity investments

Long-term passive holding of commodity futures does not earn a return, concludes a group of agricultural economists.

It’s the reiteration of a conclusion gutsily made by Scott Irwin and Dwight Sanders in 2012 — at the very height of the long-term commodity bull market, when multitudes believed otherwise.

“No-one wanted to hear what we were saying,” said Irwin in an interview, recalling the reception to his study, A Reappraisal of Investing in Commodity Futures.

Irwin and Sanders concluded that buying and holding long commodity futures didn’t earn money over the long run. Their 2020 update goes further: holding passive long commodity positions actually loses money in the long term because there are transactional and financing costs to futures positions.

That is not a challenge to traditional agricultural economics thinking, Irwin acknowledges.

“I thought that 30 years ago, and before that, and that hasn’t changed.”

In fact, generations of agricultural economists had determined that futures were a zero-sum game in the long run.

But that doesn’t mean it wasn’t a radical-seeming idea when he and Sanders stated it in 2012, when fortunate investors on the up-side of a rally were making out like bandits.

A handful of academics, famous investors and well-heeled investment houses had leapt upon the idea of long-term commodity investment in the mid-2000s, embracing the market’s newfound enthusiasm for commodities as stock markets struggled to break out of a lingering range.

However, their view diverged from those investors who believed that there was a cyclical bull market in commodities and that investors could benefit from trading in and out of commodities to profit from the powerful rallies that tended to occur in these situations. The belief in passively holding long commodity positions was fundamentally different, but often not seen as such, by many who were long-time commodity market observers.

However, after the commodity bull market died in 2014, and disappointing results piled atop each other, the enthusiasm for passively holding long commodity positions collapsed. From less than $100 billion in long-only commodity funds held before the boom, investment rose to almost $450 billion, to slump to about $160 billion by the end of 2015.

It’s not a surprising situation, considering the poor returns believers in long-term passive holding of commodities have received, but it underlines the importance of understanding the realities of commodity markets.

Irwin’s study didn’t receive much attention in 2012 or since, garnering few citations in ag economics literature and general investing discussion.

This update to the research, verifying the previous results, isn’t causing much of a stir either, Irwin notes.

But it’s worth re-examining because hundreds of billions of dollars have swung around based on erroneous conclusions and it’s worthwhile to nail down lasting principles, even if it’s not forever.

“We seem to have a need to rediscover that fundamental result every 30 years or so during a supercycle,” said Irwin.

“I do study after study and I come up with the same result.”

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