COMMODITY INDICES
Figure 4: WTI & Gold Term Structures & Roll Return
was attributable to the roll return. This compares to a +6.0% p.a. gen-
erated by the spot price.
Buy, hold
& reinvest What Drives Commodity Term Structures?
The different types of commodity term structure can be explained
Oil backwardated curve
positive roll return
by the theory of storage and the existence of convenience yield. The
relationship between the forward and spot price is defined as:
Formula 2:
Forward Price = Spot Price + Interest Rate
Gold contangoed curve
– (Convenience Yield – Storage)
negative roll return
Formula 2 relies on the fact that by storing rather than selling the
commodity, one surrenders the spot price, but, incurs interest and
Source: DB Global Markets Research
warehousing costs. However, offsetting these costs, are the benefits
T
accruing from holding inventory – the convenience yield.
ABLE 3: COMMODITY INDEX UNIVERSE
Commodity Launch Historic Data
The Convenience Yield
Index Date From:
A holder of inventories in a particular commodity generates a con-
S&P GSCI January 1991 January 1970
Dow Jones-AIG July 1998 January 1991
venience yield. This is the flow of services and benefits that accrues
RICI July 1998 July 1998
to an owner of a physical commodity, but, not to an owner of a con-
DBLCI February 2003 December 1988
tract for future delivery of the commodity. This can come in the form
DBLCI-MR February 2003 December 1988 of having a secure supply of raw materials and hence eliminating
RJ/CRB* June 2005 January 1994
the costs associated with stock-outs. Rearranging Formula 2 above
DBLCI-OY May 2006 December 1988
implies that:
MLCI June 2006 June 1990
Forward – Spot = –Roll Yield = (Interest Rate – [Convenience Yield -
LBCI July 2006 December 2000
Storage Cost]) or;
Diapason CI July 2006 December 1997
CXCI November 2006 December 1996
Formula 3:
CYD CI November 2006 December 1979
Convenience Yield = Roll Return + Storage Costs
DBLCI-OY Broad January 2007 September 1997
+ Interest Cost
DBLCI-OY Balanced January 2007 September 1997
UBS Bloomberg CMCI January 2007 October 1997 To solve for the convenience yield one only has left to estimate the
* The original CRB index was launched in 1957, which solely tracked fixed costs of storage for each commodity. For this we use industry
commodity spot prices
estimates, Table 4.
Source: DB Global Markets Research, S&P GSCI, DJ-AIG, UBS, Bloomberg, Deutsche Börse,
Since storage costs are fixed, the share of costs accounted for by
Diapason.
storage will be a function of the spot price. For example, in 1989 the
of returns within the DBLCI and most average WTI spot price was USD19.60/barrel. Fixed costs for storing
other commodity indices has largely a barrel of oil amount to USD0.40/barrel per month and conse-
been concentrated in the energy sector. quently for that year fixed costs were USD4.80 (0.40x12) or
Figure 5 illustrates how energy returns 24.49%. Over the 1989-2004 period, storage costs have amounted
have significantly outperformed all the to an average of 22% per annum. We have repeated this exercise
other components of the DBLCI over the for the other five components of the DBLCI and the results are pre-
last 18 years. Indeed between 1989 and sented in Table 5.
2004 crude oil returns have averaged With this ammunition we are able to calculate the average con-
20.2% per annum, of which +9.0% p.a. venience yield for each commodity since it will be the sum of the roll
return, storage and interest rate costs, Table 5. We then compare
Figure 5: Total Returns For Single Commodity Indices
the convenience yield to the days of above ground stocks, that is
(1989 – 2007)
the amount of time it would take to run out of available commer-
cial supplies if production ceased and consumption growth
remained unchanged.
TABLE 4: ESTIMATED FIXED STORAGE COSTS
Storage Cost Average Cost
1989 – 2004 US$/Month Per Annum
Crude Oil (WTI) 0.40/barrel 22.05
December 1988 = 100
Heating Oil 3.00/metric ton 22.05
Aluminium 7.80/metric ton 6.31
Gold 0.004/oz 0.01
Wheat 3.33/bushel 11.91
Corn 2.00/bushel 9.97
Source: DB Global Markets Research Source: Industry Estimates, DB Global Markets Research
44 SEPTEMBER 2007 COMMODITIES NOW
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