Natural Resources Flashcards
Farmland
- Usually held by individuals
- Proximity to markets, access to water, quality of soil matter
Timberland / Raw Land
- Held by institutitions
- Specialized expertise required to invest
- Choice of when to harvest timber depends on price rates
Commodity futures
Utilized by farmers to hedge their expected harvest
Three key types of commodities
Metals, Agricultural products, Energy products
Characteristics of commodities
- Government subsidies for certain crops
- Controlled access to natural resources
- Climate change regulations may influence demand
[Commodities] ETPs
Includes ETFs and ETNs (notes)
Suitable for investors limited to buying equity
[Commodities] Managed future funds
Managed by commodity trading advisers and are either specified or diversified
- Structured as LPs or mutual funds
- Separately managed accounts for larger investors
Commodity valuation
Futures price = spot price * (1+ risk-free rate) + storage costs - convenience yield
Convenience yield = value of having commodity for use over the period of contract
Contango
Little or no convenience yield
Decreases return of long-only investors
Backwardation
When convenience yield is high enough to offset storage costs
Increase return of long-only investors
Supply of commodities
- Usually fixed in the short term and highly inelastic
- Often influenced by weather conditions / natural disasters
Returns of commodities
- Volatility for commodities > Volatility for global stocks
- Timberland / Farmland = higher average returns but lower volatility than global stocks
- Speculators have opportunity to earn
Correlation w/ bonds & equity
Historically low correlation
Good hedge against inflation as with high inflation, commodities outperform bonds/stocks
