Commodity Return Predictability

The futures curve of an aggregate commodity portfolio is time-varying and changes from upward (contango) to downward sloping (backwardation) which implies negative or positive expected returns. The basis arises as a natural fundamental to predict commodity returns. However, the empirical evidence at the aggregate portfolio level is very weak. I construct a factor based on different forward rates along the futures curve and find that commodity returns are predictable. Economic fundamentals, such as industrial production or global trade, positively predict aggregate commodity returns and used jointly with this forward rates factor significantly improve overall predictability in- and out-of-sample. I find evidence that expected aggregate commodity returns are procyclical. When economic activity is high, the commodity yield curve tends to be inverted and expected returns are high