Commodities makeup the very basic of our economy and they are part of every aspect of our lives. Commodities are all around us and they are part of the bed we sleep in, the car we drive and the breakfast we eat in the morning. Without a commodity futures market to set and regulate prices, the essential commodities we need in life would be scarce and too expensive. Some of the most basic commodities include crude oil, natural gas, grains, copper, aluminum, gold, sugar, coffee, hogs, and many more. In this page we will explore some of the basic commodities to get a better understanding how they affect us and what the investment implications are.
Base metals are closely tied to global industrial production and once it gains momentum metals such as steel, copper, aluminum, and zinc are among the first commodities to surge in demand. Base metals are the backbone of the worldâs industrial economy and are used in cares, building kitchen appliances, and almost any consumer product you can think off.
It is important to understand that supply is inelastic and new mines have very long lead times. It can take up to 5 years from prospecting to bring a mine online. Acquiring the proper permits and doing the environmental assessments is a lengthy process and in many western countries with stringent environmental standards this process can be as long as 10 years.
Copper is traded on the LME and NYMEX commodity exchange, symbol HG. The ETN is traded on the NYSE, symbol JJC.
Copper has many attractive characteristics such as corrosion resistance, electrical and heat conductivity which makes copper a good material for things like electrical circuit boards, heat sinks, roofing, pluming and refrigeration and air conditioning systems. However, construction and electronic applications account for 60 percent of total copper demand. Chile with vast reserves is the largest copper producer in the world.
Aluminum is traded on the LME and NYMEX commodity exchange, symbol AL. The ETN is traded on the, symbol NYSE: JJU
Aluminum is the most abundant of all the metallic elements. It is much lighter than steel but equally strong. It is used in a number of products including cars and airplanes. Bauxite ores, which is the ore that contain aluminum oxide, are plentiful in the ground but converting the ore into aluminum is a heavily energy intense process and requires a smelter.
Nickel is traded on the LME commodity exchange, symbol N. The ETN is traded on the NYSE, symbol JJN
Nickel is used a variety of industrial and consumer products, including magnets, coinage, rechargeable batteries, electric guitar strings, microphone capsules, and special alloys. However, most nickel demand comes from stainless steel production where nickel is a key ingredient. Even though Nickel is plentiful underneath the ground only three countries, Russia, Canada, and Australia are responsible for about half of all of the worldâs production.
Zinc is traded on the LME commodity exchange, symbol ZN. ETN JJM tracks the price of nickel, copper, zinc, and aluminum on the NYSE.
Half of all demand for zinc comes from the construction industry where itâs used in flooring systems, roofing, and ductwork for heating and air conditioning. It is frequently coated onto steel or iron in a process called galvanizing making it corrosion resistant. Australia, China, and Peru produce about half of the worlds zinc supply, although China is by far the largest producer.
Lead is traded on the LME commodity exchange, symbol Pb. The ETN is traded on the NYSE, symbol LN
Lead is one of the heaviest metals despite it being soft. Lead is mostly used for ballast in the keel of sailboats to counterbalance the heeling effect of wind in the sails. A large amount of lead can also be found in batteries and ammunitions. The top producers of lead are Australia, China, USA, Peru, Canada, Mexico, Sweden, Morocco and South Africa.
Tin is traded on the LME commodity exchange, symbol SN. The ETN is traded on the NYSE, symbol JJT
Tin is a relatively rare metal. Tin is corrosion resistant and more than half of demand for this metal is used to make solder for joining components on a circuit board. Indonesia, China and Peru are largest producers of Tin
Uranium is traded on the NYMEX commodity exchange, symbol UX. Uranium and Nuclear power ETFs include URA, NLR, and NUCL.
Uranium is mostly used as fuel for powering nuclear plants but it is also used in the defense industry to make special types of ammunition like high-density penetrators that consists of depleted uranium. Most of the worldâs production of uranium comes from Canada, Australia and Kazakhstan. Uranium ore bodies are typically found in porous rocks like sandstone. The costs of uranium as a fuel is extremely low in regards to the energy it generates compared to alternatives such as oil and coal. Australia and Canada is responsible for almost half all the worldâs uranium production.
Globally changing diets, rapid urbanization, and population growth is leading to growing demand for agricultural commodities and rising food prices. The world has seen a 30 year period of stable food prices but this is about to change. For most governments, food security ranks has high as energy security, and the viability of nations domestic agricultural industry is often vigorously protects with aggressive tariffs. Furthermore, farming throughout the world is highly subsidized and regulated. As a result of all government protection the industry has become inefficient. Western farmers have actually found themselves in the bizarre situation of being paid not to farm.
During the 1960 huge progress were made in farming, advances in seed varieties and the use of pesticides helped increase crop yield about 5% per year. By 1970 western economies dominated the agricultural industry. Food supplies were rising and the excess was exported to poorer countries under different aid programs. However, over the last 30 years investment in farming has declined and the average farmer has gotten much older with ever fewer people joining the industry. This has led supply shortages and higher food prices. To further exacerbate the problem increasing energy prices is making food production even more expensive.
One reason that North America and Western Europe is a leader in commercial farming is because of the liberal use of fertilizers. Fertilized crops grow up to 50% faster than unfertilized crops. Fertilizers, include cow dung or plant food along with critical nutrients that help to spur growth and resist disease. There are a wide variety of available fertilizers but they are all based on plant nutrient derived from nitrogen, phosphate, and potassium.
Potassium based fertilizers are created from potash and help to increase water retention and resist disease in crops. Potash, a pinkish crystal-like substance is mined in potash mines and this has become a very lucrative business for potash mining companies. Some of the largest potash reserves are found in Saskatchewan, Canada. The Potash Company (POT) which is running one of the largest potash exploration companies in the world capitalized on this opportunity and it has been reflected in their stock price. Between 2001 and 2011 the stock went up 2000% as demand for fertilizers were booming.
A game changing technology that has greatly improved grain yields comes from genetically modified seeds. By combining seed DNA scientists have been able to create seeds that offer superior resistance to drought and decease. The Monsanto Company (MON) is the undisputed leader in genetic modifications.
Behind most of the food we take for granted such as a typical breakfast of coffee, orange juice, egg, and bacon, lies a dynamic and powerful commodity business. These items sometimes have to travel thousands of miles before they show up in your local grocery store.
Coffee originated in Ethiopia but was first cultivated in the Arab world. It later spread to Europe and America. There are two main species in coffee, Arabica a milder flavor, and Robusta with a stronger more bitter taste. Both of them come from seeds of coffee cherries that grow on small evergreen shrubs. These shrubs require a warm and wet habitat.
Coffee is a huge global business and it represents the largest export for many countries. Brazil is currently the worldâs largest coffee producer with an annual output of more than 2.5 million tons, while the US is the largest coffee drinking in the world.
Sugar comes from sugarcanes and sugar beets and they are found almost anywhere throughout the world. Sugar canes accounts for about 75% of all refined sugar in the world and are grown in tropical or subtropical regions of the world. Sugar beets on the other hand can be grown in cooler climates. Brazil is currently the worldâs largest sugar producer accounting for about 20% of worldâs sugar production. During the last bull market in commodities sugar prices went up 45 times and made a lot of commodity traders very rich. At the height of the sugar bull market coffee shops and restaurants were removing the free sugar bowl from the tables.
Oranges were cultivated thousands of years ago in Southeast Asia. There are three common varieties of oranges including Mandarin, Navel and Valencia oranges. The largest consumers of orange juice include the United States, Europe, Canada, and Japan. However, Brazil is by far the largest producers of oranges and orange juice. They produce a quarter of all oranges and half of all orange juice and frozen concentrated orange juice in the world.
Cocoa is a key ingredient in chocolate, one of the worldâs favorite sweet. Cocoa is a powder derived from the seeds of the cacao tree. To bring out the chocolate flavor, the seeds goes through a process of being cured, sun dried, cleaned, and roasted. Over 60% of all cocoa is used for making chocolate. The Ivory Coast is the biggest cocoa producer and supplies the world with more than a third of all cocoa. The sweet loving Europeans are by far the biggest consumer and account about 40% of all consumption.
China is the largest consumer of pork and America is the largest producer of pork products. The pork industry is seasonal with more demand around spring and summer when Americans and others fire up their barbeques. Grain is used to feed live hogs and as a result the price of grain affects the price of hogs.
Grains include items like rice, wheat, soybeans, and corn. They are the very basic of most of the worldâs diet but they are also used to feed live stock raised for consumption. The grain industry is very cyclical with widely fluctuating prices. The US is a mayor grain producer and the single largest producer of both corn and soybeans. The US is also the largest wheat exporter although production only accounts for 10% of total supply. Japan, Brazil, and South Korea are the largest importers of wheat.