Natural Resources Flashcards
(7 cards)
Natural resources
Commodities, raw land, farm land, timber land
Commodities
Can be either hard or soft. Energy (Oil, natural gas, electricity, coal), Base metals (Copper, aluminum, zinc, lead, tin, nickel) Precious metals (Gold, silver, platinum) Agriculture (Grains, livestock, coffee) Other (Carbon credits, freight, forest products). Physical commodity mkt lacks price transparency. Exhibit high correlation with inflation & act as an effective inflation hedge (Perform well during inflation & poorly during low inflation). Supply of commodities adjusts more slowly than does demand for commodities.
Exchange-traded products (ETFs) or (ETNs), may be suitable for investors restricted to equity shares or seeking simplified trading through a standard brokerage account.
Investing with commodity trading advisers - CTAs are managed futures funds that make directional investments primarily in futures markets based on technical and fundamental strategies.
Specialized funds investing in specific commodity sectors (Public & Private funds)
Commodity investments are typically direct underwriting of the acquisition, mgt, and extraction of the natural resource itself. These investments usually involve direct or indirect claims to physical assets themselves and not claims on residual (equity) or fixed (debt) CF. Usually, the convenience yield is related inversely to inventory levels of underlying commodity. Volatility of commodity prices is much higher than that of reported consumer inflation. Commodity investment exhibit high risk because of high leverage
Backwardation & Contango
When the spot price is above the forward prices, there is backwardation, a downward-sloping, or inverted, forward curve. This can occur for physically settled contracts when the convenience yield is positive and the benefit of holding the commodity outright exceeds the cost of carry. When the spot price is below the forward prices, there is contango because the cost of ownership exceeds the benefit of a convenience yield and the forward price will be above the underlying spot asset price. As a rule of thumb, a contango scenario generally lowers the return of the long-only investor, and a backwardation scenario enhances it.
Timber land
Harvest time can be chosen. Serves both as warehouse and factory. Investors investing directly in timberland need forest investment expertise to manage a forest over its life cycle. Many large institutional investors that do not have this expertise rely on timberland investment management organizations (TIMOs) entities that support institutional investors by managing their investments in timberland by analyzing and acquiring suitable timberland holdings directly or indirectly for institutional investors.
Farm land
Consists mainly of row crops that are planted and harvested (more than one round of planting and harvesting can occur in a year depending on the crop and the climate) and permanent crops that grow on trees or vines. Farmland may also be used as pastureland for livestock. Little flexibility in production. Highly sensitive to unexpected weather changes. Agricultural commodity futures contracts can be combined with farmland holdings to generate an overall hedged return.
Both TL & FL
Trade infrequently hence appear to be less volatile than commodity & public sec. Historical correlation between TL & PS are close to zero, Physical improvements are required for RE not for these. The location of land is also important; the closer it is to transportation and markets, the higher the price. While the proximity to transportation is also a factor for real estate, transportation expenses can be a significant
component of the price of the products paid by the end-user of timberland and farmland. To make investments in raw land, timberland, or farmland, investors need specialized knowledge and understanding of the specifics of the natural resource. REIT invest in these but not in raw land
Inflation vs commodity price
Commodity price increase result in inflation increase. So both happen simultaneously but inflation rate increase after commodity price increase because inflation rate calculation takes time to incorporate price changes.
