Reading 80: Natural Resources

Book 4: Alternative Investments

What drives the value of land, timberland, and farmland?

location

proximity to transportation and markets

access to water and quality soil

Who generally owns farmland?

individuals

Who generally owns timberland and raw land?

institutions

Which has bigger lot sizes—farmland or timberland?

timberland

3 Types of Commodities

metals

agriculture

energy

Why are the costs of commodities different from other derivatives?

storage and transportation costs

Separately Managed Accounts (SMAs)

for larger investors who may require custom portfolios

Futures Price =

spot price x (1 + risk free rate) + storage costs – convenience yield

Convenience Yield

the nonmonetary value of having a physical commodity for use over the period of a futures contract

Contango

when futures prices are greater than spot prices due to little or no convenience yield

Backwardation

when futures prices are less than spot prices due to a high convenience yield offsetting storage costs

Is supply elastic or inelastic for commodities

mostly inelastic due to long lead times which can alter production levels

Do commodities outperform equities and bonds during high-inflation periods or low-inflation periods?

high-inflation periods