Still On Sale: Thanksgiving Commodities

Eric Fry By Eric Fry
Macro Strategist, The Oxford Club

Market Trends

“Your Thanksgiving dinner is on sale,” we declared one year ago when we pointed out how cheap most agricultural commodities had become.

Spoiler alert: Your Thanksgiving dinner is still on sale. In fact, the commodities that make that special meal possible are even cheaper now than they were last year.

Perhaps an investment opportunity is beckoning…

One year ago, we identified the “Thanksgiving commodities” as corn, wheat, soybeans, cocoa, coffee, sugar and natural gas.

“Grains like wheat and corn are staples of a farm-raised turkey’s diet,” we explained. “Grains also contribute to the turkey stuffing, dinner rolls and pie crusts. Sugar and cocoa are key for various dessert items. And natural gas is the fuel that cooks everything on most Thanksgiving tables. Gas does the job either directly or indirectly by powering about one-third of the nation’s electric power grid.”

These various commodities had fallen to their lowest levels in many years. Therefore, we used them as a metaphor for the entire commodity complex and observed, “Many commodities are better buys than sells.”

Although that forecast was not entirely off target, most commodities have failed to advance since last Thanksgiving. The chart below shows the price change of various commodities since last Thanksgiving. As you can see, the results are mostly negative. No one would be giving thanks for investment returns like these!

Although demand is on the rise for nearly every commodity on Earth, supply has been sufficient to meet that rising demand. As a result, most commodity prices continue to languish close to multiyear lows.

Base metals are the one conspicuous exception. In that sector, demand has overtaken supply and driven prices to multiyear highs.

Natural gas and crude oil also gained ground. But in general, commodities remain on the “sale counter,” trading well below their 10-year average price levels.

And when it comes to the “Thanksgiving commodities” in particular, prices have fallen to their lowest levels of the last 20 years!

Of the seven Thanksgiving commodities, five are trading below levels they hit in the mid-1990s, when Troy Aikman was quarterbacking the Dallas Cowboys on Thanksgiving Day games!

Not surprisingly, therefore, the Bloomberg Commodity Total Return Index has dropped to its lowest level of the last 26 years, relative to U.S. stocks. Ironically, this poor relative performance is a promising sign.

Early in 1999, the Bloomberg Commodity Index fell to a similarly depressed level. But over the ensuing nine years it soared nearly 300% while U.S. stocks went absolutely nowhere…

These investment results seem like a lifetime ago, as the last nine years have produced a completely different result. The S&P 500 Index has soared more than 300%, while the Bloomberg Commodity Index has produced a loss.

But markets are cyclical creatures. They lurch from extreme highs to extreme lows… and back again. So we should not be surprised by a reversal of fortunes that features a less buoyant stock market and a more buoyant commodity sector.

Commodities could produce a spectacular investment result over the next few years – a result that might be as impressive as its recent performance has been dismal.

The base metals have already taken flight, and this sector often leads the rest of the commodity complex…

One way to gain broad exposure to the commodity sector is to buy the iPath Bloomberg Commodity Index Total Return ETN (NYSE: DJP). This security tracks the price trends of crude oil, natural gas, copper, corn, soybeans, gold, silver, sugar and heating oil.

Investors who prefer a more targeted approach could invest in one of the iPath Bloomberg Commodity Subindex ETNs such as the…

  • iPath Bloomberg Industrial Metals Subindex ETN (NYSE: JJM)
  • iPath Bloomberg Precious Metals Subindex ETN (NYSE: JJP)
  • iPath Bloomberg Agriculture Subindex ETN (NYSE: JJA)
  • iPath Bloomberg Cotton Subindex ETN (NYSE: BAL)
  • iPath Bloomberg Livestock Subindex ETN (NYSE: COW).

Clearly, many commodities are still in a deep funk.

But this down-and-out sector seems to be dusting itself off and gaining a small bit of respectability.

So I’m going to go out on a limb and predict that the lagging Thanksgiving commodities will come to life during the next 12 months and begin catching up with their base metals counterparts… which means your Thanksgiving dinner will likely be a bit more expensive next year.

Good investing,

Eric