-- John Kemp is a Reuters market analyst. The views expressed are his own --

By John Kemp

LONDON, April 27 (Reuters) - If Rip Van Winkle was a commodity investor, and had fallen asleep in the middle of 1990, or 2000, only to wake up in 2010, he could be forgiven for thinking the super-cycle had never happened.

Despite the surge in prices of a wide range of raw materials from crude oil to copper, corn and coffee, most bullish investors have not made money in commodity futures.

What they have gained from being long in outright prices they have mostly paid back in the contango. Many would have done better holding a short position.

Unbelievably, the last six years have been a great time to be short in the commodity futures market. If that seems counter-intuitive, take a look at the attached charts, which show how long commodity futures positions have performed in the past two decades:

(1) http://graphics.thomsonreuters.com/ce/IDX-RTN-1.pdf (2) http://graphics.thomsonreuters.com/ce/IDX-RTN-2.pdf (3) http://graphics.thomsonreuters.com/ce/IDX-RTN-3.pdf (4) http://graphics.thomsonreuters.com/ce/IDX-RTN-4.pdf (5) http://graphics.thomsonreuters.com/ce/IDX-RTN-5.pdf

Shorts have made more money rolling positions forward in contango markets than they have lost as a result of rising spot prices.

Even if the outlook is for commodity prices to rise, it could still make sense for investors to be short.

ZERO RETURNS

Chart 1 shows how prices for a broad-basket of commodity futures contracts included in the Goldman Sachs Commodity Index <.SPGSCI> have performed since 1990.

It also shows the total return to investors after taking into account profits and losses from rolling spot contracts forward each month, and interest earned on the U.S. Treasury securities posted as collateral for the futures positions. Finally, it shows the excess return (returns on the portfolio excluding any income from the Treasuries held as collateral).

Spot commodity futures prices have risen almost 175 percent since 1990. But the actual return to investors has been lower, around 140 percent. Much of this came from income payments from the Treasury securities as collateral. The excess return attributable to the commodity futures (spot appreciation and roll yields) has been just 12 percent since 1990. Excess return has been just 0.6 per year.

Performance of commodity futures has been even worse in recent years. Chart 2 shows spot prices, total return and excess return since 2004, which marked the beginning of widespread interest in commodities as an asset class.

Spot prices have doubled since 2004. But the total return to investors has been zero. Even that flatters the performance of the commodities part of the portfolio because investors have been receiving regular interest payments on their collateral securities. Excess returns have actually been negative. The commodities component has shrunk almost 14 percent over the last five and a bit years.

Everything investors have gained from rising spot prices, and interest payments on their collateral, has been given back in the form of negative roll yields.

NOT ALL OIL'S FAULT

The GSCI is a production-weighted index, which results in it being heavily biased towards crude oil (WTI and Brent) and refined products (gasoline, heating oil and gasoil). These items all tend to move together and account for just over two-thirds of the total index. Adding in natural gas, the combined energy weighting in the index rises to just over 70 percent.

Most observers have blamed the GSCI's poor performance on the persistent contango. The contango in crude has indeed been much more common in the past six years than previously. But the problem is not confined to oil markets.

Charts 3 and 4 show the performance of the GSCI Light Energy Index (which cuts the share of energy contracts from 70 percent to around 40 percent) and the GSCI Non-Energy Index (which excludes them altogether).

Reducing the weighting does not improve performance. Total returns to investors have averaged just 1.2 percent a year in the light energy index since 2004 and 2.4 percent in the non-energy index. Excess returns attributable to the actual commodity components in both cases remained negative.

The light-energy and non-energy indices cut exposure to crude and other energy products. While these suffered some of the biggest roll losses, they posted some of the best spot gains. So the modified indices have cut roll costs but at the expense of less spot price appreciation.

PESKY CONTANGO

The problem is not confined to crude. Chart 5 shows the annualised excess return on the 24 futures contracts in the GSCI since 2004. Fourteen contracts posted positive excessive returns but 10 posted losses after adjusting for collateral yields.

Copper was the best performer exhibiting an excess return of 27 percent per year since 2004. U.S. natural gas was the worst with a loss before collateral yield of 41 percent a year.

Crude oil was a fairly average performer. Owning the WTI contract since 2004 would have inflicted a small loss (negative return of 1.7 percent per year). Owning Brent futures would have resulted in a sizeable gain (positive excess return of almost 10 percent).

The poor return on WTI futures compared with Brent is directly attributable to the well-known congestion around the NYMEX delivery point at Cushing, and the resulting contango problem. It underscores the vital importance of curve structure in determining actual returns to investors.

In fact the spot performance of commodity futures is (almost) irrelevant from a long-term investment perspective. Note how much better a long investment in Brent, gasoline or gas oil has performed compared with the same investment in WTI. Spot price performance is mostly cyclical. But roll costs/gains are more structural.

The question is not whether spot prices rise or fall, but how much of any gain is swallowed up by the roll costs of remaining long. Chart 5 suggests roll costs swamp other factors in explaining differences in long-term performance.

Until 2005, excess returns to investors closely tracked movements in the spot price of the GSCI basket (Chart 1 again). But from the middle of that year, excess returns have fallen further and further, suggesting that curve structure (the contango problem) has emerged as a structure feature in most commodity markets. The key question for investors is whether it will be a permanent one.

For part 2 of this article please double click on [ID:nLDE63Q24K]. ((john.kemp@thomsonreuters.com; reuters messaging: john.kemp.reuters.com@reuters.net; +44 207 542 9726))

Keywords: COLUMN COMMODITIES/BIG SHORT