The Commodity Futures Risk Premium: 1871 – 2018

Using a novel comprehensive database of 230 commodity futures that traded between 1871 and 2018, we document that futures prices have on average been set at a discount to future spot prices by about 5%. The historical risk premium is robust across commodity sectors and varies with the state of the economy, inflation and the level of scarcity. Although the majority of contracts are defunct, most commodities have earned a positive risk premium over their lifespan. We find empirical support for Gray’s conjecture that survival of futures contracts is correlated with the returns earned by investors. Finally, we provide out-of-sample evidence that “factor” strategies based on commodity basis and momentum have historically earned positive returns over time but are subject to prolonged drawdowns (crashes) that are not dissimilar to those experienced by the overall market.