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BEST AND WORST COMMODITY
PERFORMERS
Were there better places to be over this past year? You bet. When trading futures, we use leverage. In many cases, all that’s required is a 5 percent margin deposit of a contract's value. Under this scenario, just a 5 percent raw price move results in a 100 percent return on the initial margin deposit. There have been days this year where various commodities have moved 5 percent in just one day. However, leverage is a double-edged sword, and the downs can be equally as dramatic as the ups, placing commodity futures in the high-risk category. What if you remove leverage from the equation, putting the entire value of the contract up front as most people do when trading stocks? Looking at it this way, over the past year there have still been some fairly impressive moves in many commodities. However, not all commodities are created equal, and certain commodities lost value during 2007. Top Commodity Performers (in descending order) No. 4--Gold
*Prices based on the February futures contract In just the past few weeks, the US Federal Reserve pumped $40 billion of new liquidity into the financial system. This action should have trashed the US dollar, but the greenback actually strengthened. Why? Not to be undone, the European Central Bank (ECB) pumped EUR500 billion into the banking system during just this past week, and the Bank of England (BoE) contributed an additional EUR20 billion. These are massively large numbers, the magnitude of which is hard to grasp. So, which currency is the best place to be? If you think of gold as money, gold is the one currency that should ultimately benefit from this massive paper money explosion because it's very inflationary. Will gold remain in the top performer category during 2008? My vote is yes. No. 3--Crude Oil
February Oil
Source: Commodity.com The International Energy Agency (IEA) recently increased its estimate of 2008 world oil demand to 87.8 million barrels per day (MPDA). According to T. Boone Pickens, world production capacity tops out at 86.0 MPDA. Is a recession coming? Perhaps, but recessions in the past haven't appreciably decreased energy demand since this demand is somewhat inelastic. My best guess is oil will remain firm in 2008, but because of the raw price appreciation in 2007, it won't necessarily make the 2008 top performer list. However, here’s one prediction for you: $100-a-barrel oil (sometime early in 2008), here we come. No. 2--Soybeans
January Soybeans
Source: Commodity.com On Dec. 21, soybeans closed at a new 34-year high. In just the first quarter of the marketing year for soybeans--the marketing year runs from September to September--the US has already sold 65 percent of the country's annual target for soybean sales. As long as China continues to buy soybeans at a record rate, this market should remain strong. How high is too high? It depends on how big the newly planted South American crop will turn out. If it's big, the market could top out shortly. If there are any weather problems in that part of the world into early next year, there's no way of telling how high is really high.Next year acreage is projected to be up, but demand should also reach a new record high. Future price predictions here are tough, so we’ll need to go with the flow. No. 1---Minneapolis Wheat
March Minneapolis Wheat
Source: Commodity.com Wheat ending stocks are at a 60-year low because of poor crops this year in Australia, Canada and the Ukraine. US wheat exports are up 66 percent versus a year ago, and the US has already sold 90 percent of its annual target for wheat sales. The supplies of the Minneapolis wheat variety, spring wheat, are particularly tight because of sharply lower planted acreage this year. Incredibly, more corn acreage was planted in North Dakota than spring wheat. This has never happened before and probably won't happen again. With these record-high wheat prices, it's no surprise the planted acreage for next year’s wheat crop is sharply higher. Will wheat be one of the 2008 top performers? My vote is no. Bottom Commodity Performers No. 4--Coffee
Commodities aren't all created equal. Coffee prices actually lost 5 percent in 2007. What's the best estimate for 2008? Assuming normal growing weather in the coffee growing regions of the world (South America, Asia and Africa), coffee will still move back into the plus column, but not necessarily the top tier. Weather problems? Numbers will be much higher if the answer to this question is yes. No. 3--Sugar
2006-07 Sugar
Source: Commodity.com This is one of Jim Rogers' favorites. However, a whole host of markets, including the world’s stock markets, fared much better than sugar in 2007. Sugar was also a poor performer in 2006, down 41 percent last year. To be fair, Rogers has been bullish on sugar for years, and it was the top performer for 2005 (up a remarkable 227 percent). This coming year? At historically cheap prices with the major trend turning up, my best guesstimate is sugar will be solidly in the plus column by the end of 2008. No. 2--Hogs
Because of poor profit margins and record high numbers, the hog market fared poorly in 2007. However, the hog cycle is about six months long, and when producers are squeezed, they traditionally adjust by cutting production. With feed prices high, the squeeze continues and numbers should be much smaller in 2008, along with the associated higher prices. A top performer in 2008? Not necessarily, but my vote for the hog market next year is a standing in the plus column. No. 1--Orange Juice
2006-07 Orange Juice
Source: Commodity.com One of the best performers for 2006 up 161 percent, orange juice took the cake for the worst spot in 2007. And the outlook for this coming year? When it comes to orange juice, your guess is as good a mine. Here’s wishing you a very happy holiday season and a very prosperous new year.
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