Investors love the idea of holding an asset that is uncorrelated with everything else in their portfolios. That simple concept may be the main reason for the strong interest in commodities. Having decided to participate in commodities, some investors imagine that nothing more than the financial skills they have developed in the stock and bond markets will be required for success. The same know-how, they assume, will enable them to capture the asset class’s full return, diversification benefits, and some alpha to boot.

In reality, commodities may be the most poorly understood of asset classes. The very reason for its attractively low correlation is the uniqueness of its price dynamics. Key determinants include weather, inventory changes, production shifts, and demand shocks. Unfortunately, unraveling the mysteries of these essential variables is no easy task. For the most part, exposure to commodities is obtainable only through trading futures contracts, for which limited research is available.

Jeffrey A. Hirsch and Scott W. Barrie seek to fill the knowledge gap with the Commodity Trader’s Almanac, an annual project presented in a calendar format. They provide a wealth of data and insights on the grain, “softs” (cocoa, coffee, and sugar), energy, and metals markets. Even investors who have traded commodities for decades will find something to take away from this rich compendium.

The Commodity Trader’s Almanac is not really a book, although it is chock-full of information on fundamentals and price behavior. It consists of a desk calendar with weekly commentary on timely commodity data for every season. Additionally, it has trader quips and quotes for each day and space for notes. An extensive appendix provides a statistical abstract on returns and seasonal relationships for every major traded commodity.

More important than the unique calendar format in the Commodity Trader’s Almanac is the key theme that drives commodity research and epitomizes its distinctness from equities and bonds: seasonality. Prices change with seasonal demand and supply, and these price relationships have a high degree of consistency through time.¹

For traditional Northern Hemisphere grain crops, for example, the rhythm of planting and harvesting is tied to the region’s seasons, although increased crop production in Latin America is altering these traditional patterns to some extent. In North American energy markets, seasonality reflects the shift in demand from winter heating to summer cooling and refining cycles tied to switches of production between heating oil and gasoline for the summer driving season in North America. The value of gold follows patterns tied to holiday shopping demand. Hog and cattle cycles are based on birth and maturing; coffee and orange juice are sensitive to weather conditions during the frost season. The mix of Hirsch and Barrie’s weekly tables changes as the year progresses, enabling the reader to focus on the strongest seasonal relationships in each period.

To be sure, tracking “seasonals” is not a guaranteed path to riches in commodity trading because price behavior also reflects variation over time in risk premiums. For example, grain markets have a heightened risk premium during planting season, when the foundation for supply is determined. Natural gas becomes more volatile at commencement of the heating or cooling season in relation to the amount of the commodity that has been placed in storage.

Another limitation of the Commodity Trader’s Almanac is that only so much information can fit on a single page for each week. This space constraint necessitates the omission of some details of price swings. For example, the authors describe the March behavior of natural gas by showing that the market has generally rallied in response to end-of-winter cold snaps. They make the case for a systematic March rally by noting that in 16 of 17 years, the March high for natural gas was higher than the February close. Annualized volatility in the natural gas market, however, is close to 50 percent. Thus, the observed relationship between the February close and March high may really be simply noise.

A general flaw in the Commodity Trader’s Almanac is one that has plagued commodity research for as long as futures have been traded: the confusion between data and analytically useful statistics. For example, the authors report that natural gas prices usually decline at the end of the winter heating season, but the authors do not establish whether the tendency is statistically significant. I am reminded of the plethora of baseball “statistics.” Consider batting average, the player’s safe hits divided by the player’s official times at bat. The fact that a batter has a high average against left-handed pitchers with batters in scoring position during day games is interesting, but is the number of observations large enough to make the ratio meaningful? Although we have no indication that the authors knowingly “hype” their numbers or oversell the seasonal relationships, the reader is clearly being told this association is important.

All in all, the Commodity Trader’s Almanac is a good launching point for considering commodities, but investors must take care to determine whether the seasonals it reports are valid bases for trades. Seasonals are best thought of as consistent, time-varying risk premiums, much like business cycle risk premiums but condensed over shorter horizons. The seasonals do not invariably reveal pricing inefficiencies, however, or arbitrage profits. In many cases, elevated returns indicate simply that investors are being compensated for heightened risk during a certain period.

Nevertheless, thumbing through the calendar’s extensive tables will give new participants an education that they would never pick up from ordinary market chatter. Before initiating a commodity trade, investors should be sure they know whether seasonal patterns are with them or against them. The Commodity Trader’s Almanac provides a good first look every week of the year.

—M.S.R.