Post updated: 6/30/2023
Commodities go in-and-out of favor, moving up-and-down in supercycles. So how you know which commodities are the best to invest in?
Using 75+ years of data, we will look at the top 3 commodities of the 7 decades, and then give 4 simple, practical tips for and researching and buying commodity stocks for long term investors.
Table of Contents
- #1 Best Commodity (1947-2021): Iron and Steel
- #2 Top Commodity (1947-2021): Fuels and Power
- #3 Top Commodity (1947-2021): Lumber
- #4 (a) Top Commodity (1947-2021): Nonmetallic Minerals
- #4 (b) Top Commodity (1947-2021): Hides and Skins
- Investing in Commodities (4 Tips to Remember)
Feel free to click above to skip ahead to section. Now, on to the basics of commodities and how you can think of the way they are organized by investors.
In general, you can think of commodities as divided into the following 4 main “buckets”:
- Energy – not just crude oil but natural gas, heating oil, etc.
- Metals – gold, silver, copper, etc.
- Agriculture – corn, coffee, cotton, beans, etc.
- Animals/Livestock – all types of various animals such as hogs, cows, etc.
The top 3 performing commodities based on average annual PPI growth since 1947, according to data I pulled from FRED:
- Iron and Steel; average growth = 5.2% per year
- Fuels and Power; average growth = 5.0% per year
- Lumber; average growth = 4.2% per year
With a two-way tie for 4th place:
4a. Nonmetallic Minerals; average growth = 3.6% per year
4b. Hides and Skins; average growth = 3.6% per year
Every single commodity on this list has had its own upcycles and downcycles—in other words, booms and busts.
One of the big misconceptions about long term commodity prices is that they move in supercycles all together as a group. This is wrong; each has its own cycles which sometimes move together with other commodities, and sometimes not!
Let’s see how by presenting each commodity’s growth rates during their rough up-and-down cycles.
Best Commodity (since 1947): Iron and Steel
Price data on Iron and Steel spans all the way back to 1926, with roughly 7 commodity supercycles defining its price action.
| Years | Average Annual Growth (PPI) | # of Years |
| 1926 – 1945 | 0.2% | 19 |
| 1946 – 1956 | 8.6% | 11 |
| 1957 – 1968 | 0.8% | 12 |
| 1969 – 1988 | 7.3% | 20 |
| 1989 – 2001 | -0.6% | 13 |
| 2002 – 2011 | 9.5% | 10 |
| 2012 – 2019 | -1.5% | 8 |
| 2020 – 2021 | 53.4% | 2 |
Interestingly, the 2021 YOY average was the highest year of growth ever over these 95 years, where Iron and Steel PPI increased 87.8%.
This increase greatly boosted this commodity’s long term average growth; without 2021 Iron and Steel averaged 4.2% since 1947.
Iron and Steel has been characterized by the following average annual growth rates:
- Average (since 1926) = 4.6%
- Average (last 40 years) = 5.0%
- Average (last 20 years) = 9.5%
- Average last 10 years) = 9.5%
In general, the average cycle for Iron and Steel can be defined as around 10- 13 years. The average up-cycle has been around 10- 13 years, and the average down-cycle has been around 11- 13 years.
#2 Top Commodity (since 1947): Fuels and Power
Price data on Fuels and Power also spans all the way back to 1926, with roughly 7 commodity supercycles defining its price action.
| Years | Average Annual Growth (PPI) | # of Years |
| 1926 – 1945 | -0.7% | 19 |
| 1946 – 1956 | 4.6% | 11 |
| 1957 – 1968 | 0.2% | 12 |
| 1969 – 1981 | 17.2% | 13 |
| 1982 – 1995 | -1.1% | 14 |
| 1996 – 2011 | 8.2% | 16 |
| 2012 – 2021 | 1.3% | 10 |
Fuels and Power has been characterized by the following average annual growth rates:
- Average (since 1926) = 4.1%
- Average (last 40 years) = 3.2%
- Average (last 20 years) = 6.1%
- Average last 10 years) = 1.3%
In general, the average cycle for Fuels and Power can be defined as around 13 years. The average up-cycle has been around 13 years, and the average down-cycle has been around 13- 15 years.
#3 Top Commodity (since 1947): Lumber
Price data on Lumber also spans all the way back to 1926, with roughly 8 shorter commodity supercycles defining its price action.
| Years | Average Annual Growth (PPI) | # of Years |
| 1926 – 1932 | -8.5% | 6 |
| 1933 – 1950 | 12.2% | 18 |
| 1951 – 1966 | 0.2% | 16 |
| 1967 – 1978 | 12.2% | 12 |
| 1979 – 1990 | 0.9% | 12 |
| 1991 – 2004 | 4.1% | 14 |
| 2005 – 2011 | -2.3% | 7 |
| 2012 – 2021 | 8.5% | 10 |
Lumber has been characterized by the following average annual growth rates:
- Average (since 1926) = 4.8%
- Average (last 40 years) = 3.6%
- Average (last 20 years) = 4.3%
- Average last 10 years) = 8.5%
In general, the average cycle for Lumber can be defined as around 12 years. The average up-cycle has been around 14 years, and the average down-cycle has been around 12 years.
#4a Top Commodity (since 1947): Nonmetallic Minerals
Price data on Nonmetallic Minerals also spans all the way back to 1926, with roughly 7 commodity supercycles defining its price action.
| Years | Average Annual Growth (PPI) | # of Years |
| 1926 – 1944 | 0.2% | 18 |
| 1945 – 1957 | 4.5% | 13 |
| 1958 – 1967 | 0.5% | 10 |
| 1968 – 1985 | 7.3% | 18 |
| 1986 – 2004 | 1.8% | 19 |
| 2005 – 2014 | 3.9% | 10 |
| 2015 – 2021 | 2.8% | 7 |
Nonmetallic Minerals has been characterized by the following average annual growth rates:
- Average (since 1926) = 3.1%
- Average (last 40 years) = 2.6%
- Average (last 20 years) = 3.2%
- Average last 10 years) = 2.8%
In general, the average cycle for Nonmetallic Minerals can be defined as around 14- 15 years. The average up-cycle has been around 14 years, and the average down-cycle has as low as 10 years and as high as 20 years.
#4b Top Commodity (since 1947): Hides and Skins
Price data on Hides and Skins also spans all the way back to 1926, with roughly 5 commodity supercycles defining its price action. The latest downcycle has been the longest (32 years), which may be signaling a secular downtrend in the supply/demand balance for this commodity.
| Years | Average Annual Growth (PPI) | # of Years |
| 1926 – 1932 | -11.6% | 6 |
| 1933 – 1950 | 15% | 18 |
| 1951 – 1970 | -1.2% | 20 |
| 1971 – 1989 | 15% | 19 |
| 1990 – 2021 | -0.2% | 32 |
Hides and Skins has been characterized by the following average annual growth rates:
- Average (since 1926) = 4.8%
- Average (last 40 years) = 2.1%
- Average (last 20 years) = 0.6%
- Average last 10 years) = -5.0%
Key Lesson on Commodities in a Secular Downtrend!
Notice the steadily declining averages from 1926, to the last 40, and then 20 and 10 years. This further reinforces the idea that Hides and Skins may be in a secular (permanent) price downtrend.
The factors that tend to contribute to secular downtrends in commodity prices include:
- Better substitutes for the commodity which permanently reduce demand
- Technological innovation which reduces cost of production, leading to more easily attainable increases in supply
In general, the average cycle for Hides and Skins looked to be around 19 years. The average up-cycle has been around 18- 19 years, and the down-cycle has been as low as 20 years and as high as 32 (and counting).
Next, let’s hear from Andy Shuler on some of his simple yet insightful tips on investing in commodities and commodity stocks over the long term.
4 Simple Tips to Live By When Investing in Commodity Stocks
Typically, when people talk about commodities, they seem to be talking about trading them. That is 100% my own biased opinion, but I very infrequently hear people that are actually investing in commodities.
When I talk about investing, I want to find a good investment that I can put money into and not worry about for many, many years down the road. With commodities, they seem much more volatile and the opportunities seem to be more short-term focused.
But if you’ve decided to invest in commodities, and I don’t think that’s necessarily a bad thing, I recommend you pay attention to these tips below to make sure that you’re setup for success:
1– Stay within your circle of confidence
This is not only a tip for commodities but a tip just in general. Always focus on investing in things that you know. If you invest in what you know then you’re going to immediately be a step up on some others because not everyone sticks to that, and I would even venture to guess that many people get wrapped up in the hype and invest in something that they do not know.
If you want to invest in something that you don’t know, then learn about it and then invest in it. I think this advice is even more important with commodities because you need to understand how their market prices are impacted because it is not similar to normal market fundamentals with stocks.
2– Understand that the market prices for commodities are primarily based off supply and demand
Yes, there obviously is a cost for all commodities, but the prices are typically based off of supply and demand rather than a sort of fundamentals that you’re likely used to.
Anytime that some sort of crisis happens that might impact the supply, you’re going to see the prices of these commodities skyrocket. Andrew highlighted this with the prices of pork back when there were huge concerns about the Swine flu, and there has been a great example of this in early 2020 with the war concerns in Iran.
The backstory there: Iran launched a missile attack on some US Troop bases in Iran. When the market closed the day of these attacks (but before the attacks occurred) the price of Crude Oil was $62.61. After these attacks had become known to the world, the price of Crude Oil spiked. Big time. It went from $62.61 up to $65.48, an increase of 4.6% in a matter of hours. The next morning, Trump came out and said that nobody was killed in the attacks and that the US strongly prefers to not engage in a war, the price of crude oil sank back down to $60.37 at the close the next day, a decrease of 8.5% from the high and 3.7% from the prior day close.
So, in a span of 24 hours, we saw the price of crude oil spike by 5% and then decrease by 8.6% all because of speculation that supply might tighten. That is not trading on fundamentals whatsoever – it’s 100% speculation.
3– Supply and demand can be impacted by many things
As I previously mentioned, the supply and demand of a commodity is what really impacts the prices of that commodity. This can be impacted by many things – war, disease, natural disaster, terrorism, anything! The fact of the matter is to understand that this is an unpredictable investment and that if you’re not comfortable with the risk, then you should stop considering commodity investing immediately.
4– If you’re going to investing in a company that heavily leans on commodities, you should at least understand the basics of how commodities work
This can apply to many companies such as an oil company that purchases crude oil, a steel company, a coal company, a food company that relies on livestock – anything! You don’t need to know the ins and outs, necessarily, but the more you know, the better. It’s great to understand the company’s balance sheet but if their main Cost of Goods Sold is a commodity, then I would certainly be sure to understand the different potential circumstances that could drastically change the impact of the company.
Other Commodity Price Statistics Since 1947
In no particular order, here are some other popular commodities and their average annual growth since 1947 (using the same FRED website for PPI data):
- Rubber and Plastics = 3.1%
- Chemicals = 3.5%
- Farm Products = 2.4%
- Textiles = 1.7%
- Pulp and Paper = 3.5%
- Processed Foods and Feed = 2.5%
Knowing this historical data about commodities and their price movements over time can go a long way towards increasing your confidence in holding commodity companies over the long term (or give you good reasons to avoid them).
Andy’s Investor Takeaway
You might read these tips and think that I am completely against this – and you’d be wrong! I think that as long as follow these tips then commodity investing can be a fantastic form of diversification.
Most of my tips really boil down to one thing – understanding what you’re investing in. You need to understand what makes the price change, potential risks to the commodity, potential future opportunities for it, and then try to think ahead a little bit!
You’re about to invest in livestock – well, what do you think about the impact of people moving to vegetarian options? You want to invest in oil – well, what do you think about the impact of electronic vehicles? These are all the types of questions that you should have a clear vision on about what YOU think is going to happen.
As long as you know what you’re investing in and you have conviction, then investing in commodities can be a great tool for your portfolio. If you don’t have an appetite for volatility, then maybe you should consider something a little bit less risky…but hey, as Lil Wayne said it best, “scared money don’t make money.”
