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Commodities: To Short, or Not to Short?

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Commodities: To Short, or Not to Short? [Chart]

Commodities: To Short, or Not to Short? [Chart]

Comparing “Dogs of the Dow” inspired strategies over the last decade

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

Over the last week, we have received a wide variety of reactions from our audience regarding the Periodic Table of Commodity Returns that we published last Thursday from our friends at U.S. Global Investors.

The most interesting email came from Brad Farquhar, the Executive Vice President and CFO of Input Capital, a Canadian-based agricultural streaming company. In his email, Brad attached a chart summarizing the cumulative returns using a long/short commodity strategy where he imagined going long on the worst performing commodity of the previous year, while shorting the best performing commodity.

For example, the long-only portfolio would have invested in natural gas in 2007, because gas was the worst performing commodity in 2006 with a -43.9% return. The short-only strategy would have shorted nickel in 2007 (betting that nickel would drop in price) because it was the best performer of 2007 with 145.5% returns.

On a cumulative basis (re-investing money from each year), the long-only strategy returned -0.9% compound annualized growth between 2007 and 2015, while the short-only strategy brought in 12.4% annualized returns.

A 50/50 hybrid (50% long, and 50% short) gave us the equivalent of 9.6% returns each year.

Our Variation

Inspired by Brad’s analysis, we did our own variation of this “Dogs of the Dow” type of exercise to look at these long and short commodity portfolios in a slightly different light.

We analyzed five portfolios (100% long, 75% long, 50% long/short, 75% short, and 100% short) for the average annual return, volatility, and number of years with positive returns.

Here’s the results:

Portfolio
Return
Standard Deviation
# of Positive Years
100% long
9.0%
54.9%
4
75% long
10.3%
39.7%
6
50% long/short
11.7%
25.8%
5
75% short
13.1%
16.9%
7
100% short
14.5%
20.9%
7

The best performing portfolio was 100% short, with an average annual return of 14.5%. The 75% short portfolio had nearly as good of returns at 13.1%, with the lowest volatility (using standard deviation) at +/- 17%.

Both the 100% short and 75% short portfolios provided positive returns in 7 of the last 9 years. Meanwhile, going long was much more risky. A 100% long portfolio had gains in only 4 of 9 years, with a huge standard deviation of +/- 55%.

Over the time period in question, energy commodities killed portfolios with “long” exposure. In 2011 and in 2015, the worst performer of the previous year (natural gas and oil respectively) was also the worst performer the following year, creating terrible returns for the long-heavy portfolios.

Oil, for example, was down -45.6% in 2014 and then was also down -30.5% in 2015. Not a very effective strategy.

What will be a better trade in 2016: shorting the best performing commodity of last year (lead), or going long on nickel, the worst performer of 2015?

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Agriculture

The Most Valuable Agricultural Commodity in Each State

Which agricultural commodity is the most important to each state’s economy? This infographic breaks it all down, based on data from the USDA.

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The Most Valuable Agricultural Commodity in Each State

The United States has an incredible amount of geographic diversity.

From the fertile farmland of the Great Plains to the volcanic islands in the Hawaiian archipelago, each state has been dealt a unique geographical hand.

Each geographical setting can be the source of economic opportunities, such as tourism or the development of natural resources. It also partially dictates what kind of agricultural choices are available for farmers and local economies.

A Higher Level Look

Today’s infographic comes to us from HowMuch.net, and it color codes each state based on the most valuable agricultural commodity it produces, based on data from the U.S. Department of Agriculture.

At a big picture level, how does the country break down?

Most Valuable Agricultural CommodityNumber of States
Grains, oilseeds, dry beans, and dry peas16
Poultry and eggs9
Cattle and calves7
Milk from cows7
Nursery, greenhouse, floriculture and sod4
Fruit, tree nuts, and berries3
Vegetables, melons, potatoes and sweet potatoes2
Aquaculture1
Other crops and hay1

Broadly speaking, the category of “Grains, oilseeds, dry beans, and dry peas” is the most valuable agricultural commodity in 16 states, while aquaculture was the most important in only one state, which is Alaska.

It’s interesting that there are niches that end up deriving massive amounts of value in only a few states. For example, the category of “Fruit, tree nuts, and berries” is the biggest in just three states, but California makes $17.6 billion from it every year – more than the size of the entire agricultural sector of some states.

State by State Data

Finally, here’s a look at the data for each state in a sortable table:

RankStateAgricultural CommodityValue
#1CaliforniaFruit, tree nuts, and berries$17,638,972,000
#2IowaGrains, oilseeds, dry beans, and dry peas$17,146,679,000
#3IllinoisGrains, oilseeds, dry beans, and dry peas$13,589,230,000
#4TexasCattle and calves$13,013,127,000
#5MinnesotaGrains, oilseeds, dry beans, and dry peas$12,304,415,000
#6NebraskaGrains, oilseeds, dry beans, and dry peas$10,698,861,000
#7KansasCattle and calves$10,153,087,000
#8North DakotaGrains, oilseeds, dry beans, and dry peas$8,813,348,000
#9IndianaGrains, oilseeds, dry beans, and dry peas$7,217,854,000
#10OhioGrains, oilseeds, dry beans, and dry peas$5,834,600,000
#11South DakotaGrains, oilseeds, dry beans, and dry peas$5,809,792,000
#12WisconsinMilk from cows$4,952,039,000
#13North CarolinaPoultry and eggs$4,837,026,000
#14GeorgiaPoultry and eggs$4,773,837,000
#15ColoradoCattle and calves$4,321,308,000
#16ArkansasGrains, oilseeds, dry beans, and dry peas$4,214,355,000
#17MissouriGrains, oilseeds, dry beans, and dry peas$3,922,873,000
#18AlabamaPoultry and eggs$3,624,852,000
#19MichiganGrains, oilseeds, dry beans, and dry peas$3,613,250,000
#20OklahomaCattle and calves$3,402,919,000
#21WashingtonFruit, tree nuts, and berries$2,931,370,000
#22MississippiPoultry and eggs$2,744,048,000
#23New YorkMilk from cows$2,417,398,000
#24IdahoMilk from cows$2,333,364,000
#25PennsylvaniaMilk from cows$1,966,892,000
#26FloridaFruit, tree nuts, and berries$1,847,805,000
#27LouisianaGrains, oilseeds, dry beans, and dry peas$1,832,208,000
#28MontanaGrains, oilseeds, dry beans, and dry peas$1,787,162,000
#29KentuckyGrains, oilseeds, dry beans, and dry peas$1,656,983,000
#30South CarolinaPoultry and eggs$1,476,817,000
#31TennesseeGrains, oilseeds, dry beans, and dry peas$1,301,303,000
#32New MexicoMilk from cows$1,251,065,000
#33VirginiaPoultry and eggs$1,161,564,000
#34WyomingCattle and calves$1,101,195,000
#35MarylandPoultry and eggs$922,999,000
#36OregonCattle and calves$894,485,000
#37DelawarePoultry and eggs$811,301,000
#38ArizonaVegetables, melons, potatoes and sweet potatoes$764,062,000
#39VermontMilk from cows$504,884,000
#40New JerseyNursery, greenhouse, floriculture and sod$405,247,000
#41West VirginiaPoultry and eggs$401,439,000
#42UtahCattle and calves$364,214,000
#43NevadaOther crops and hay$280,554,000
#44ConnecticutNursery, greenhouse, floriculture and sod$252,923,000
#45MaineVegetables, melons, potatoes and sweet potatoes$207,254,000
#46HawaiiGrains, oilseeds, dry beans, and dry peas$152,930,000
#47MassachusettsNursery, greenhouse, floriculture and sod$144,188,000
#48New HampshireMilk from cows$54,798,000
#49Rhode IslandNursery, greenhouse, floriculture and sod$32,831,000
#50AlaskaAquaculture$29,774,000

As the legal cannabis industry continues to take off, it’ll be interesting to see if the USDA incorporates that crop into its rankings in future years.

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Agriculture

Balancing the Environmental Costs of Cannabis

Legal cannabis cultivation emits as much CO2 as 92,660 cars annually. Growing cannabis sustainably can reduce this massive environmental footprint.

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Balancing the Environmental Costs of Cannabis

Economic development comes with a massive environmental cost.

Since 1980, heavy industrial activity has caused the doubling of CO2 emissions. As scientists warn of the lasting negative impacts this will have on the planet, nearly every industry is committing to sustainable practices to try to counteract this effect.

Today’s infographic comes from The Green Organic Dutchman, and it demonstrates that while the business of cannabis isn’t always eco-friendly, there are several tried-and-tested ways to reduce its massive footprint.

A HEFTY PRICE TO PAY

Energy is the second-highest cost driver in cannabis cultivation after labor.

There are two main culprits – lighting and HVAC systems (heating, ventilation, and air conditioning). Combined, they make up a whopping 89% of energy use in cannabis cultivation operations.

Last year, legal cannabis cultivation was responsible for consuming 1.1 million MWh of electricity, and producing 472,000 tons of CO2 emissions. That’s enough to power 92,500 homes, and produce the same emissions as 92,660 cars per year. As legal cannabis production scales, this will only escalate.

Much of this data can be attributed to how the plant is grown.

Growing methodPower consumption (kWh/g)Carbon intensity (lbs CO2e/g)
Indoor1.271.24
Greenhouse0.940.72
Outdoor0.070.05

Indoor cultivation is roughly 18 times more energy-intensive than outdoor cultivation, and produces 25 times the carbon emissions. On the other hand, outdoor production produces lower overall yield per square foot. Since it’s difficult to control the environment, impurities can also end up in the final product.

That’s why many companies opt for a hybrid approach instead – balancing the benefits of precise control, with the use of natural light to lower production costs.

A GAME PLAN FOR SUSTAINABILITY

Many licensed producers are adopting a suite of strategies to relieve this environmental footprint.

  • Renewable energy
    Diversifying the energy sources for cannabis cultivation can reduce carbon emissions. Solar and wind are top choices among cultivators.
  • LED lighting
    LED light bulbs are more than 60% more efficient than other types. They also produce barely any heat, lowering ventilation requirements.
  • Water efficiency
    A single cannabis plant can use up to 23 liters of water per day. Water can be recycled and re-used through innovative techniques such as reverse osmosis.
  • Packaging
    The plastic packaging often associated with cannabis products is a considerable contributor of waste. There are several alternatives, such as paper, glass, and tin. Each of these have their own benefits and drawbacks, depending on what they are used for.

Maximizing energy-efficiency has a domino effect not only on the planet, but on reduced operating costs. These savings can then be passed on to the buyer, which could prove to be a strong competitive advantage as the cannabis industry matures.

Stay tuned for part 6 of this series, where we’ll delve into the scientific evidence for medical cannabis compounds.

The Story of Cannabis: What Investors Need to KnowAnatomy of a Cannabis PlantA Quality Cannabis ProductThe Rise of OrganicA Sustainable Cannabis ProductThe Science Behind the $13 Billion Medical Cannabis IndustryComing soonComing soon

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