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Guide to commodities

WisdomTree believes that investors should always understand and fully appreciate the risks involved in their investments.

 

Our guide to commodities provides an excellent starting point for investors who want to learn more about investing in the major commodities such as gold, silver, copper, wheat, sugar and coffee.

 

In addition to providing an introduction to specific commodity fundamentals, the pages outline the key factors and trends affecting different commodity markets and information on how to gain exposure to them.

Useful resources

 

ETPedia

How to invest

GUIDE TO COMMODITIES - SELECT A COMMODITY BELOW TO FIND OUT MORE

CRUDE OIL

 

Crude oil is a naturally occurring fossil fuel that is found in certain rock formations in the earth. It is a mixture of hydrocarbons that is refined into petroleum products, such as gasoline, kerosene, gas oil and fuel oil. According to the Energy Information Administration (EIA), over the past several decades oil has been the world’s foremost source of primary energy consumption.

 

Many varieties of crude oil are produced around the world, the characteristics of each determined by the particular oil’s geological history. Due to the wide variety of crude oil types, they are priced and traded relative to well-known benchmarks. There are two benchmarks in particular that dominate world futures oil trading – Brent Crude and West Texas Intermediate (WTI). Both the Brent and WTI classifications are considered light, sweet crude (low in sulphur content and density), containing a higher percentage of light products, like gasoline fuel or kerosene, and requiring less refinement before going to market.

Crude oil prices are influenced by a complex interaction of underlying supply and demand factors, geopolitical events and increasingly more developed spot and futures trading. The behaviour of the Organization of the Petroleum Exporting Countries (OPEC) can have a significant impact on the price of oil.

Market snapshot

Between 2002 and 2012 global production of crude oil increased 15 per cent1 with the largest regional increase in output coming from the Middle East (including large producing OPEC nations), which has seen supply grow 29 per cent1. In 2012 the three largest producers of oil were Saudi Arabia, Russia and the United States (see figure 1). Between 1988 and 2008 US supply decreased 44 per cent1, however this trend was reversed in 2009 as output from shale oil (also referred to as light tight oil) and other technological developments helped increase US production by 23 per cent1 between 2008 and 2012. US oil production is expected to surpass Saudi Arabia as the world’s largest oil producer in 20162. While all non-OPEC supply is expected to increase over this period, OPEC, and Saudi Arabia in particular are expected to remain the world’s key swing producers.

Figure 1: Global Crude Oil Supply, 2012

Figure 1

Source: BP Statistical Review of World Energy 2013
Over the last decade global oil consumption has increased 14 per cent1, with the largest regional increases occurring in the Middle East and Asia Pacific. In 2012 the largest consuming countries were the United States and China (see figure 2). Demand in China surged 94 per cent1 between 2002 and 2012, in stark contrast to falling US consumption. Economic development in Asia can be expected to drive consumption amongst non-OPEC nations, with the largest absolute growth in demand emanating from China and India between 2010 and 20402. Consumption amongst OPEC nations in the Middle East is also expected to grow on the back of growing populations, rising wages and increased industrial output.

Figure 2: Global Crude Oil Demand, 2012

 Figure 2

Source: BP Statistical Review of World Energy 2013
Oil is currently the most widely traded commodity in the world. Global trade has increased 24 per cent1 in the last decade, with China’s net oil imports making up 86 per cent1 of the global increase in trade in 2012. The largest importers of oil in 2012 were the US, Europe and Japan (see figure 3). US imports of oil have been in decline since 2008 and this trend could continue with rising domestic production and decreasing demand due to increases in vehicle fuel economy. Japan is heavily dependent on trade, with imports making up 99.4 per cent1 of domestic consumption in 2012.

Figure 3: Global Crude Oil Imports by Country, 2002-2012 (Thousand Barrels Daily)

Figure 3

Source: BP Statistical Review of World Energy 2013
It is forecast that continued technological developments and increasing output in the US could reduce its requirement for imports and see it become a more prominent player in the export market. Exports from the Middle East and Russia, currently the two largest exporters of crude (see figure 4), can also be expected to continue to service the rising demand for oil in Asia.

Figure 4: Global Crude Oil Exports by Region, 2002-2012 (Thousand Barrels Daily)(tsd. Barrel pro Tag)

Figure 4

Source:: BP Statistical Review of World Energy 2013

Important factors and trends

OPEC is an intergovernmental organisation of twelve oil-exporting developing nations that coordinates and unifies petroleum policies in an attempt to manage production. At present, around 40 per cent of the world's oil supply and 60 per cent of global petroleum trade comes from OPEC member countries3. Consequently variations in OPEC’s market share and surplus production capacity can impact the price of crude oil. Additionally, geopolitical instability in certain OPEC countries can lead to a short term tightening of supply, often resulting in a spike in oil prices.

Figure 5: OPEC Surplus Crude Oil Production Capacity (Million Barrels Per Day)

Figure 5

Source: EIA, Short-Term Energy Outlook, February 2013
Strong growth from shale oil and oil sand productions in North America have supported global oil supply since 2012 and have helped offset output declines in the North Sea fields. The global supply/demand balance is especially sensitive to US shale oil growth, given 80 per cent of non-OPEC growth is coming from the US. Outside the US, the development of shale oil is still at an early stage, however there are indications that point to large amounts of technically recoverable resources distributed globally.
Oil is traded on a global market and price differences between US crude and internationally traded benchmarks have been limited until recently. Traditionally WTI and Brent have traded at near parity however over the past two years this spread has both widened and narrowed at different points (see figure 6 below). Recent fluctuations in the WTI-Brent spread have been influenced, in part, by two key factors – structural changes with increasing output in North America and geopolitical instability across the Middle East.
An important characteristic of the global supply chain of oil is the use of stored oil, referred to as inventories, to manage alterations in supply/demand dynamics. Unlike some other commodities, producers of oil can use inventories, in addition to new output, to satisfy demand. For example, inventories can be used by producers to make up for unexpected shortfalls in supply during geopolitical crises. As a component of supply, inventory levels are often a good indicator of market pressures on the price of oil.

Investing

One way for investors to gain exposure to oil is by investing in publically listed companies involved in oil exploration, production and trading. A significant variety of oil equities are frequently bought and sold, with the equity market populated by large market capitalisation oil companies including ExxonMobil, Royal Dutch Shell and BP.
There are two primary benchmarks for Crude - WTI and Brent. A variety of contracts are traded on a number of exchanges, the largest including CME’s NYMEX, ICE and DME. The two most liquid futures contracts are the NYMEX WTI Crude Oil Futures (‘CL’) and ICE Brent Crude Futures (‘B’). The contract size for both is 1000 barrels and they are priced in US dollars and cents per barrel. Trading hours are between 9:00am-2:30am ET.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)

A variety of Crude Oil ETPs track indices that are constructed to simulate a continuous exposure to crude oil futures returns. The crude oil spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to crude oil futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to crude oil futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

There is a wide variety of ETPs providing investors with the ability to simulate a continuous exposure to crude oil futures returns. Through ETPs, investors are able to access exposure to front month as well as longer-dated WTI and Brent futures returns and indices that adjust exposure based on pricing and fundamental factors. Examples include 1 month/1 year/2 year Brent Oil Futures and Dow Jones-UBS Brent and WTI Oil Subindices.

Price

Figure 6: WTI and Brent Crude Oil Price Chart (US Dollars)

Figure 6

Source: Bloomberg

  • 1.BP Statistical Review of World Energy 2013
  • 2.International Energy Agency, World Energy Outlook 2013
  • 3.US EIA, Energy & Financial Markets: What Drives Crude Oil Prices

NATURAL GAS


Natural gas is a fossil fuel in gaseous form that is colourless, shapeless, and odourless in its pure form. It is a mixture of hydrocarbon gases formed primarily of methane; it is combustible, clean burning, and gives off a significant amount of energy.

Natural gas is produced from wells around the world and it is normally transported via pipeline. When pipeline transport is not feasible, for example over long distances, the natural gas is turned into a liquid (Liquefied Natural Gas or LNG) by super-cooling and transported as a liquid on tankers before being warmed up and turned into a gas upon arrival at the delivery port. Before being used as a fuel natural gas has to go through extensive processing.

Natural gas is used primarily for heating and generating electricity by industries such as pulp and paper, metals, chemicals, petroleum refining, stone, clay and glass, plastic, and food processing. It is also a major feedstock for the production of ammonia used in fertilizer production. Once considered a by-product of oil exploration, natural gas use has gained traction as an efficient, environmentally friendly and economical alternative to crude oil.

Market snapshot

In the last decade the world production of natural gas has increased 33 per cent1. The two largest producers of natural gas are the United States and Russia who combined made up 38 per cent1 of total world production in 2012 (see figure 1). Regionally, much of the increase in supply can be attributed to growing output in the Middle East where production has increased 121 per cent1 since 2002. In contrast, production in a number of European producing nations has decreased over the last decade and production in Russia has increased only modestly. In the United States, however, production increased 7 per cent1 (2010/11) and 5 per cent1 (2011/12) on the back of increased output from shale gas. This is a key factor behind the sharp drop in US natural gas prices.


 Figure 1: Global Natural Gas Supply by Region, 2012 (Billion Cubic Feet)

Source: BP Statistical Review of World Energy 2013
Natural gas is the world’s fastest-growing fossil fuel in terms of demand, with consumption expected to increase by 64 per cent2 between 2010 and 2040, much of which is driven by demand in developing countries. The largest consumers of natural gas are the US and Russia, which combined made up 34 per cent1 of total world demand in 2012 (see figure 2). Although China makes up a relatively small proportion of global consumption (about 4 per cent), over the last decade demand has increased 392 per cent1 illustrating the correlation between economic development and natural gas consumption. Natural gas is regarded as a more environmentally friendly fuel in comparison to coal for example and is used extensively in the electric power sector as well as the industrial sector which combined make up 77 per cent2 of the projected increase in global consumption between 2010 and 2040.

Figure 2: Global Natural Gas Demand by Region, 2012 (Billion Cubic Feet)
 

Source: BP Statistical Review of World Energy 2013

Trade of natural gas is going through something of a transformation with the introduction of new production processes, including shale gas exploration and LNG. Between 2000 and 2010 LNG trade more than doubled2. In 2012 the Asia Pacific region was the largest source of imports with Japan accounting for 36 per cent1 of total world imports following the Fukushima nuclear, which instigated a movement away from nuclear energy. Although LNG trade is increasing, natural gas flow through pipelines still makes up over two thirds of global natural gas trade. Rising domestic production in the United States has reduced the need for imports and it is projected that by 2020 the US will become a net exporter of natural gas, which can be attributed to increased pipeline exports to Mexico2.

Important factors and trends

Natural gas is a seasonal commodity and demand is weather dependent. Changes in weather conditions and expectations of weather can have a substantial impact on natural gas prices. In 2009 approximately 50 per cent3 of homes in the US were heated with natural gas, and for this reason, winter is the peak demand period, where gas in storage grows to its peak before being used over the winter months. Depending on the severity of the winter conditions, prices generally fluctuate according to the amount of demand which is reflected in the weekly change in inventory levels.

Figure 3: Natural Gas Futures Curve (USD/MMBtu)
 


Source: WisdomTree

Due to infrastructure limitations, the world gas market has traditionally been fragmented with a number of different market hubs for gas (US Henry Hub, UK NBP for example). Although not strictly the global benchmark, the US Henry Hub benchmark is often tracked by indices trying to simulate natural gas futures returns. This benchmark is largely determined by US domestic supply and demand dynamics. In the past couple years new supply from shale gas exploration has driven the price of natural gas in the US much lower relative to other international hubs, increasing demand for American exports in different parts of the world. However, over the coming years a convergence in international gas prices could occur if international LNG trade increases.
LNG production has become more cost-efficient and accounted for 32 per cent1 of the global gas trade in 2012. However, the US natural gas market has tended to be relatively isolated from the rest of the world, with LNG imports and exports small on a relative basis compared to the Asian and European markets. Recent reductions in US LNG imports have been driven by increased domestic production, predominantly from shale gas.

Shale gas, which is found trapped within shale formations and released through fracking, now comprises 39 per cent of US total natural gas production4, offsetting declines in other US gas supplies and lowering import requirements. The net impact of this has been a significant increase in resource availability, which has contributed to lower natural gas prices.
Traditionally gas contracts, particularly in Europe and Asia, were contractual arrangements linked to the price of oil, however in recent years there has been a shift towards favouring gas indexing. This has in some part contributed to an apparent disconnect between natural gas and oil prices. As more European and Asian contracts become gas-linked, international prices could more closely reflect the fundamentals of the underlying commodity. For example, some expiring Japanese oil indexed contracts are being renegotiated so that they are indexed to the Henry Hub gas price in the hope that this will lead to lower import costs.

Investing

Investors can gain indirect exposure to natural gas by purchasing shares in publically listed companies that are involved in the exploration, refining, transport and trade of natural gas. The profitability of natural gas companies is, in some part, determined by natural gas prices thus when prices are high profits may be expected to reflect this increase. Examples of multinational companies offering some exposure to natural gas include ExxonMobil (United States), Royal Dutch Shell (UK) and Gazprom (Russia).
The most commonly traded futures contract is the Henry Hub Natural Gas Futures which trades on the Chicago Mercantile Exchange (CME). The natural gas futures prices are based on delivery at the Henry Hub in Louisiana. The contract size in 10,000 million British thermal units (mmBtu) and is priced is US dollars and cents per mmBtu. Trading hours are between 8:00am-1:30pm CT.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. Natural Gas futures contracts, in particular, have experienced a significant negative roll yield in recent years. (For more details please refer to our ETPedia by clicking here)
Natural Gas ETPs track indices that are constructed to simulate a continuous exposure to natural gas futures returns. The natural gas spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to natural gas futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to natural gas futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing natural gas futures exposure include the Dow Jones–UBS Natural Gas Subindex; S&P GSCI Natural Gas Index; UBS Bloomberg CMCI Natural Gas Index; Rogers International Commodity Index Natural Gas; Barclays Capital Natural Gas Seasonal Index (United States); Teucrium Natural Gas Fund Benchmark Index (United States).

Price

Figure 4: U.S. Natural Gas Price Chart (US Dollars)
 


Source: Bloomberg


  • 1. BP Statistical Review of World Energy 2013
  • 2. United States Energy Information Administration, International Energy Outlook 2013
  • 3. US Energy Information Administration, Annual Energy Review
  • 4. US Energy Information Administration, North America leads the world in production of shale gas

GOLD

 

Gold is a yellow, lustrous, precious metal that has been used as a store of value, currency and in jewellery. It is indestructible, fungible yet malleable and ductile and is a good conductor of heat and electricity, which means it has some industrial uses beyond investment and is sometimes alloyed with other metals. The inventory of aboveground stocks is enormous relative to the supply flow, which means that a sudden surge in gold demand can be met through sales of existing gold holdings.

Gold ore can occur either as free milling or as sulphides. Free milling gold can be separated by gravity and conventional leaching. Sulphide ore usually undergo a combination of floatation, roasting and leaching. Both of these processes result in unrefined bars of gold, silver and other impurities, referred to as gold dore. This gold is then refined to 99.99 per cent purity to be sold in the global markets.

Gold is typically used in jewellery and is measured in karats. It also has industrial uses, being found in electrical conductors and contacts, electronics, restorative dentistry, medical applications, chemistry and photography.

Market snapshot

Between 2005 and 2012, the most significant contribution to increased global production was China supply which surged approximately 93 per cent over this period. This compares to stagnant or falling production in other large producing countries including Australia, United States and South Africa. In particular, South Africa supply has fallen 44 per cent over this seven year period due to falling mining profitability. Between 2008 and 2012 the five year average of mine production as a percentage of total supply was 61 per cent. In 2012 the largest producers were China, Australia and United States (see figure 1)1.
Figure 1: Global Gold Production, 2012

etf_fig1_gold_v2-02_364x231

Source: Thomson Reuters GFMS

At the end of 2012 jewellery was the largest source of gold demand accounting for 49 per cent of total demand. However, according to the World Gold Council investment has represented the strongest growth in demand. The five years leading up to the end of 2012 saw an increase in value terms of around 435 per cent. Industrial and technological uses made up around 11 per cent of demand and official sector holdings just under 20 per cent of global above ground stocks (see figure 2)1.
Figure 2: Total Above-ground Stocks of Gold, end 2012
etf_fig2_gold_v2-02_383x231
Source: Thomson Reuters GFMS, World Gold Council

Important factors and trends

Gold has historically performed well during periods of significant monetary easing and high inflation. Unlike currencies which are easily manipulated by central bank policy, gold supply is physically limited giving it store of value characteristics.
Figure 3: Gold Price vs. U.S. Inflation

Source: Bloomberg, WisdomTree
Gold Exchange Traded Products (ETPs) provide investors with exposure to the price performance of spot gold bullion. Physical gold products are backed by gold bullion held in secure vaults. The first gold ETP was created in April in 2003 and listed on the Australian Stock Exchange. Gold ETPs have proven successful, with similar products listed on over 30 exchanges throughout the world and have seen assets under management increase dramatically since their original inception. Investors have favoured gold ETPs as they offer a cost efficient and a secure way to participate in the gold bullion market without having to take physical delivery of the gold itself.
In recent years there has been a shift in central bank attitudes to gold. For two decades the official sector was a net seller of a significant amount of gold to private sector markets however this trend shifted in 2009, with every year since seeing a growth in net central bank purchases. One of the drivers for this change is increasing demand from emerging market central bank purchases as a means of diversifying their external reserves of gold. In addition the rate of sales from European central banks has fallen significantly following the economic crisis. If this trend continues official sector holdings, and particularly central bank purchases, could become a more prominent feature of global gold purchases.
The inclusion of gold into a portfolio provides useful diversification benefits as it historically has a low correlation with most major asset classes, providing benefits for long-term balanced portfolios. In the past gold has performed well relative to other equities and other risk assets during periods of extreme economic turbulence. Gold performs an important hedging function in high volatility conditions, since it usually has a low correlation to the broader economic environment.

Investing

Investors can purchase a wide range of gold bullion coins, issued by different governments around the world. Bullion coins may range in size from 1/20 ounce to 1000 grams. The more common weights (in troy ounces) include 1/20, 1/10, 1/4, 1/2 and 1 ounce.

Gold bars can be purchased in a variety of weights and sizes ranging from one gram to 400 troy ounces (London Good Delivery bar). There are a number of different gold bars available for investors to purchase, each meeting a required fineness of 99.5 per cent.
One way investors can gain exposure to gold is by purchasing publically listed gold mining stocks. The share price of gold miners is driven in part by the gold price. Mining equities are however exposed to a number of other factors which can affect their share price. The largest producers currently include Barrack Gold, Newmont and AngloGold Ashanti who combined make up approximately 50 per cent2 of market share.
An ‘allocated’ account is an account held with a dealer in a customer’s name evidencing that uniquely identifiable bars of metal have been allocated to the customer and are segregated from other metal held in the vault of that dealer. The client has full title to this metal, with the dealer holding it as custodian.

Most metal traded in London and Zurich markets is traded and settled in ‘unallocated’ form. Bullion held in this form does not entitle the holder to specific bars of metal but gives the holder a right to require the delivery of certain amounts of metal.
The most frequently traded contract is the CME Group COMEX Gold Futures, which trades in New York under the symbol ‘GC’. The contract size is 100 troy ounces and it is priced in US dollars and cents. Trading hours are between 8:20am – 1:30pm ET. Gold delivered under this contract must meet a minimum of 99.5 per cent fineness.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here).
Gold ETPs can take two forms – physical or non-physical. Physical products attempt to provide investors with a return equivalent to the movements in the gold spot price (less management and storage fees). Non-physical (swap-based) products track indices that are constructed to simulate a continuous exposure to gold futures returns. It is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to gold futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure gold futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing gold futures exposure include Dow Jones-UBS Gold Subindex; UBS Bloomberg CMCI Gold; NASDAQ Commodity Gold Index; S&P GCSI Gold Index (United States); Deutsche Bank Liquidity Commodity Index (United States); COMEX Gold Futures (United States).

For more information on investing in gold using ETPs, visit our gold ETPs section.

Price

Figure 4: Gold Price Chart (US Dollars)

Source: Bloomberg


  • 1. World Gold Council
  • 2. Bloomberg

 


PLATINUM AND PALLADIUM


Platinum and palladium belong to a set of metals commonly referred to as the platinum group metals (PGMs), which also includes rhodium, ruthenium, iridium and osmium. Typically these metals occur together in the same mineral deposits and share similar chemical properties. Of the PGMs, platinum and palladium are the most widely used, generally found with small quantities of other metals like gold, copper and nickel. The PGMs are regarded as rare or precious metals.

PGM production is broadly a three step process – mining, smelting and refining. Typically, most PGM mining is conducted using underground methods, as most deposits are located deep beneath the ground. Mined ore is crushed and ground up to release the PGM particles, which then go through a floatation process to produce the metal concentrate. The concentrate then goes through a drying and smelting process, producing a matte product. This matte product is then refined, a process which separates the PGM from the other metals it is found with. The production of platinum and palladium is generally very similar.

Platinum and palladium are primarily used in autocatalysts in motor vehicles as well as other industrial uses including chemical, electrical, petroleum, glass and dental work. It is also used in jewellery and for investment.

Market snapshot

The dominant producer of platinum is South Africa, accounting for 72 per cent of global supply in 2012. This level of concentration means that total platinum production is predominantly determined by changes in South African output. An example of the impact of this concentration was the drop in global supply of 13 per cent between 2011 and 2012, following strikes in August and September 2012. Since 2006 output from South Africa has been decreasing due to falling ore grades and increased costs of production.

The production of palladium is concentrated mainly in two countries – Russia and South Africa, which accounted for 44 per cent and 36 per cent of global supply in 2012 respectively. The Russian State has historically held large stockpiles of palladium. More recently, however, these stockpiles have dwindled with Russian State sales accounting for a negligible percentage of supply in 2011 and 2012. Although Russian State holdings of palladium are a state secret, most analysts believe stockpiles have dropped to insignificant levels. North America accounts for approximately 14 per cent of global palladium output1.

Figure 1: Platinum and Palladium, Balance as a Percentage of Total Supply, 2003-2013

 


Sources: Johnson Matthey, WisdomTree
(*Johnson Matthey Estimates as of November 2013)

The largest consuming region of platinum is Europe, making up 25 per cent of global platinum demand. China is also important also making up around one quarter of total demand2. Growth in world consumption increased steadily between 2002 and 2007 before falling sharply in 2008-2009 during the economic downturn. Consumption has since recovered, increasing 18 per cent by 2012, and is estimated to have reached an all-time high in 2013 on the back of strong industrial sales. In 2012 demand for jewellery and autocatalysts accounted for approximately 40 per cent and 30 per cent of global use respectively1.

Over the last decade, growth in global demand for palladium has been strong, increasing 91 per cent on the back of strong autocatalyst demand. In 2012 palladium consumption in autocatalysts made up just over half of total demand, with the next largest sources of use coming from investment and electronics which both comprised of 12 per cent of global consumption.

Figure 2: Global Platinum and Palladium Use, 2012 (Million Ounces)

 


Source: Johnson Matthey

Important factors and trends

Profitability of PGM mines continues to be hurt by rising operating costs, in particular labour costs which can be both unpredictable and a substantial expense. The average operating cost of platinum production totalled $1,826 oz in 2012, a 10 per cent increase compared to the previous year (see figure 3). Reduced volumes and additional costs are rendering platinum mines increasingly less profitable. A number of key miners, including Anglo American Platinum, have announced strategic divestments in an attempt to deal with spiralling costs.

Figure 3: Platinum Miners' Costs vs Platinum Price, 2002-2013 (US$/oz)

 


Sources: Bloomberg, WisdomTree
* The average was calculated by using the two largest platinum producers that account for 66% of 2012 total platinum production, Anglo American Platinum and Impala Platinum. 

Given the geographic concentration of PGM supply, issues such as government market intervention, geopolitical instability, unreliable infrastructure, and social tensions in South Africa and Russia have the potential to substantially disrupt PGM production for prolonged periods of time, in turn impacting prices. Supply side issues, including labour disruptions and product rationalisation, are important platinum price drivers. In particular, the strike season, which starts in June, can potentially act as a short-term catalyst for PGM price rallies. Global palladium supply is particularly sensitive to changes in Russian stockpiles, with signs of stockpile depletion in 2012 and 2013 resulting in reduced volumes.
The automotive sector is a key source of demand for platinum and palladium with motor vehicles using both metals in autocatalysts. Gasoline autocatalysts utilise either platinum or palladium in combination with rhodium, diesel engine catalytic converters and diesel particulate matter filters are predominantly built with platinum and require five or ten times more PGMs than equivalent gasoline engines.

Rising demand in China, India and other developing economies, together with tightening global emission standards has helped support demand for autocatalysts and the PGMs used in them. Whilst auto sales in Europe have proven to be sluggish in 2012-13, sales in China have been supported by a number of government initiatives, including an auto subsidy package approved by the Chinese authorities. Auto sales in China are expected to have surpassed 20 million units in 2013 according to China Association of Automobile Manufacturers.

Investing

Investors can hold physical platinum and palladium by purchasing platinum and palladium coins or bars which can be bought or sold through bullion dealers. There are various refiners in the United States and Europe who produce small investment bars in platinum up to one kilogram (32.15 troy oz) in weight.
Investors can gain exposure to platinum and palladium by investing in publically listed companies involved in the production of platinum and palladium. The two largest platinum companies are Anglo American Platinum Ltd. and Impala Platinum Holdings Ltd. who combined make up 63 per cent of platinum production market share. The largest palladium company is MMC Norilsk Nickel OJSC, with a 42 per cent market share3.
Platinum and Palladium futures are traded at the New York Mercantile Exchange (NYMEX) and the London Platinum and Palladium Market (LPPM). NYMEX Platinum Futures are traded under the symbol ‘PL’ and the contract size is 50 troy ounces and priced in US dollars and cents per troy ounce. NYMEX Palladium Futures are traded under the symbol ‘PA’ and the contract size is 100 troy ounces. The settlement type for both contracts is physical.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold which would have a negative impact on the returns of an investment - this market trend is known as ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold which would have a positive impact on returns, known as ‘backwardation’. This price difference is commonly referred to as “roll yield”. (For more details please refer to our ETPedia by clicking here).
Platinum and Palladium ETPs can take two forms – physical or non-physical. Physical products attempt to provide investors with a return equivalent to the movements in the platinum and palladium spot price (less management and storage fees). Physical PGM products are backed by the corresponding amount of bullion deposited in a vault. The London Platinum and Palladium Market (LPPM) ensures there is a standardised market for trading metals by imposing minimum requirements for metal quality and inspecting storage.

Non-physical (swap-based) products track indices that are constructed to simulate a continuous exposure to platinum and palladium futures returns. It is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to platinum and palladium futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to platinum and palladium futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below). Examples of indices providing platinum futures exposure include Dow-Jones UBS Platinum Subindex; Bloomberg CMCI Platinum Index; S&P GSCI Platinum Index.

Price

Figure 4: Platinum and Palladium Price Chart (US Dollars)
 


Source: Bloomberg


  • 1. Johnson Matthey
  • 2. Data not available for 2012, however China made up 25 per cent of global demand in 2010
  • 3. Bloomberg

SILVER


Silver is a shiny white precious metal with high electrical and thermal conductivity. Although considered a harder precious metal than gold it remains malleable and ductile. Silver has been used for thousands of years in ornaments and utensils, for trade, and as the basis for many monetary systems. Silver is found in a number of minerals and also occurs as an alloy in gold, as well as copper, lead and zinc. Silver is most commonly produced as a by-product in the mining of these metals.


Silver can be extracted from ore using a variety of methods, however the most commonly applied is the cyanide process. The ore is initially crushed prior to the oxidization stage, which ensures the ore is not confined to sulphide materials. Water and sodium cyanide is then used to collect solutions in heaps. Silver is then recovered from these heaps, typically using zinc which precipitates silver from the solution. This is then filtered, melted and typically made into silver bullion bars. This method of production allows lower grades of silver ore to be processed.

As well as being used in jewellery and silverware, silver can be used for a number of industrial purposes including in switches, contacts and fuses in electrical appliances, electronic applications, batteries, brazing and soldering, nuclear reactors, manufacturing solar cells, water purification, the medical industry and as a catalyst.

Market snapshot

Between 2002 and 2012, global supply of silver increased 21 per cent, largely driven by increased output from Mexico and Russia which saw output rise 100 per cent and 250 per cent respectively. Latin America is the lead producing region with Mexico, Peru and Chile making up 40 per cent of global silver production in 2012 (see figure 1). In contrast, over this decade, production in China and Australia fell 8 per cent and 17 percent respectively. In 2012 mine production made up 75 per cent of total global silver output, with silver scrap production making up much of the rest1.
Figure 1: Global Silver Supply, 2012

Source: World Bureau of Metal Statistics
Although silver is perhaps most commonly associated with end use in jewellery, this area makes up 17 per cent of total downstream silver demand. The metal is actually most widely used for industrial applications (electrical/electronics, catalysts, brazing alloys/soldering), which combined make up 45 per cent of total downstream silver consumption (see figure 2). Over the last decade, silver use in industrial applications increased 38 per cent supported by growth in developed nations; however increased industrial demand in China and the emerging markets have become a larger component of silver demand, with consumption in China increasing 133 per cent over a four year period between 2008 and 20122.

Other end uses of silver include photography, coinage and silverware. Investment demand for silver has been increasing especially after the creation of the first silver exchange traded product (ETP) in 2006. Between 2006 and 2012 investment in silver ETP holdings increased 360 per cent2.
Figure 2: Global Silver Use, 2012

Source: Thomson Reuters GFMS

Important factors and trends

The gold:silver ratio indicates how many ounces of silver it takes to purchase one ounce of gold. Silver’s historical usage as a currency, and a store of value, gives it a strong relationship with gold and this link has been an important indicator for investors monitoring the precious metals sector. Correlations with gold have also been useful historically in predicting price movements.
Figure 3: Gold:Silver Ratio, 2004-2014

Source: Bloomberg

Although considered a precious metal, a defining characteristic of silver is its duality – following the price of gold in some circumstances and industrial trends in others. Given that industrial applications for the metal accounts for over 40 per cent of total downstream demand2, the price of silver is closely correlated to the economic business cycle and industrial demand. The applications of the metal are varied which in some circumstances can help support the price of silver when the growth cycles in one industry are weaker than in others.
Investment demand has been a significant driver of the silver price over recent years. Traditionally this demand has been in the form of physical bars, however the creation of silver exchange products (ETPs) and derivatives has ensured that investment demand has continued to grow. Silver ETP holdings have grown year-on-year since the first product was created in 2006.
Traditionally the price of silver has been more volatile than that of gold, tending to have much larger price swings. This is in part due to its high sensitivity to the global business cycle, as well as its different investment uses.

Investing

Investors can hold physical silver by purchasing silver coins or bars which can be bought through sold through bullion dealers. Commonly traded coins include the American Eagle, the Canadian Maple Leaf and the Britannia. Silver bars can come in range of different weights.
Investors can gain indirect exposure to the price of silver by investing in publically listed companies involved in the mining of silver. The largest companies include GlencoreXstrata PLC (Switzerland); Industrias Penoles SAB de CV (Mexico); KGHM Polska Miedz SA (Poland); BHP Billiton Ltd. (Australia); Goldcorp Inc. (Canada).
The global benchmark contract is the CME Group COMEX Silver Futures, which trades in New York under the symbol ‘SI’. The contract size is 5,000 troy ounces and open outcry trading hours are between 8:25am-1:25pm ET. The silver delivered under this contract must meet the minimum requirement of 999 fineness.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Silver ETPs can take two forms – physical or non-physical. Physical products attempt to provide investors with a return equivalent to the movements in the silver spot price (less management and storage fees). Non-physical (swap-based) products track indices that are constructed to simulate a continuous exposure to silver futures returns. It is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to silver futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to silver futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing silver futures exposure include Dow-Jones UBS Silver Subindex; Bloomberg CMCI Silver Index; S&P GSCI Silver Index; COMEX Silver Futures Index (United States).

Price

Figure 4: Silver Price Chart (US Dollars)

 

Source: Bloomberg





  • 1. World Metal Bureau of Statistics
  • 2. Gold Fields Mineral Service

ALUMINIUM

 

Aluminium is the world’s third most abundant element in the Earth’s crust, and weighs approximately one-third as much as steel or copper. It is malleable, ductile, easily machined and cast, and has excellent corrosion resistance and durability.

 

The primary raw material used to produce aluminium is aluminium ore, more commonly known as bauxite. Bauxite, which occurs in mainly tropical areas, is refined into alumina which is then further purified to make aluminium metal. Around five tonnes of bauxite are required to produce two tonnes of alumina; two tonnes of alumina are required to produce one tonne of aluminium metal.

 

Aluminium is the second most widely produced metal after steel, with more produced than all other non-iron/steel industrial metals combined according the International Aluminium Institute (IAI). Aluminium is used in a number of industries including construction, transport, electrical, packaging and consumer goods. 

Market snapshot

Between 2002 and 2012 global production of aluminium increased 77 per cent1. The largest and most dominant producer of aluminium is China (see figure 1), where output has grown 358 per cent1 in the last decade on the back of strong industrial growth. The United Arab Emirates and India have also seen significant increases between 2002 and 2012 with output rising 255 per cent and 155 per cent respectively1. In contrast, over the same period of time, supply has decreased 23 per cent1 in the United States, a country that used to be the world’s largest supplier of aluminium in 2002.

Figure 1: Global Primary Aluminium Supply, 2012 

supply_etf_fig1_aluminium_v2-01

Source: World Bureau of Meal Statistics

Global consumption of aluminium increased by 77 per cent1 between 2002 and 2012, with much of this increase driven by demand from developing countries in Asia. The largest consumer is China (see figure 2), where demand has increased 380 per cent over the last decade. Consumption has also increased 179 per cent in India1. In contrast US consumption has fallen 12 per cent1 over this period and EU demand has remained largely static. By 2020 metal demand is projected to increase 114 per cent2.

Figure 2: Global Primary Aluminium Demand, 2012

Source: USDA, World Agricultural Supply and Demand Estimates


Although global imports of aluminium have increased 32 per cent1 between 2002 and 2012, as a proportion of global consumption they have fallen from 65 per cent to 49 per cent1 largely due to China’s self-sufficiency. Over this decade imports into Germany have increased 51 per cent1 supporting the large automobile manufacturing industry. In 2012 the largest importer was the United States (see figure 3).







Exports of aluminium have increased 35 per cent1 between 2002 and 2012. In 2012 the largest exporter of aluminium was Russia, accounting for one quarter1 of global aluminium exports. Exports from the Netherlands jumped by 209 per cent1 between 2002 and 2012, making it the third largest exporter in 2012 (see figure 4).

Figure 3: Global Aluminium and Aluminium Alloy Imports, 2002-2012 (Million Tonnes)

trade_etf_fig3_aluminium_v2-01 Source: World Bureau of Metal Statistics


Figure 4: Global Aluminium and Aluminium Alloy Exports, 2002-2012 (Million Tonnes)

trade_etf_fig4_aluminium_v2-01
Source: World Bureau of Metal Statistics

Important factors and trends

Construction accounts for approximately 33 per cent of global downstream aluminium consumption3 . Factors driving the use of aluminium in this industry include its high strength-to-weight ratio, forming methods that aid design flexibility and its recyclability4 . Increases in commercial and residential construction, particularly in emerging markets, are key factors driving aluminium demand.

Another major driver of demand is the transportation industry (specifically automobiles and aerospace) which accounts for approximately 25 per cent of global downstream aluminium consumption3. Over the coming years aluminium use in manufacturing of motor vehicles is expected to increase considerably as the industry switches from heavier steel to lighter aluminium in order to comply with government vehicle efficiency mandates. Both this and increased demand for motor vehicles in emerging markets could result in rising aluminium demand.
Figure 5: Global Downstream Aluminium Use, 2012
сonstruction_and_transportation_etf_fig5_aluminium_v2-01
Source: Bloomberg
The geographic distribution of aluminium production has shifted over the last 40 years, determined in part by variations in energy prices. The US’s global share of production has decreased from 32 per cent in 19725 to 4 per cent in 2012. China’s market share rose to 40 per cent in 2012. Although these shifts have been driven by a variety of policy factors, China’s abundant domestic energy supplies and lower production costs were important contributing influences. However, over recent years, increases in energy prices in China have led to a number of smelters operating on a loss making basis. Continued increases in energy prices may lead to rising production costs which could reduce the China oversupply.
Whilst the production of aluminium is relatively energy intensive, the recycling of aluminium requires as little as 5 per cent of the energy and emits only 5 per cent of the greenhouse gas. Recycling plays a central role in aluminium use, as over one third of aluminium produced globally is derived from old, traded and new scrap2. Aluminium recycling helps to conserve energy and reduce the overall cost of output which is important to overall global supply.
Metal inventory levels reflect the near term balance of supply and demand forces in the market. Aluminium stockpiles saw the largest rise amongst the industrial metals in the immediate aftermath of the credit crisis in early 2009. London Metal Exchange inventories of aluminium increased from 0.93 million tonnes in 2007 to 5.21 million tonnes in 20123. If demand growth outstrips supply growth inventories could decline.

Investing

Investors can gain indirect exposure to the price of aluminium by investing in publically listed companies involved in the primary aluminium production lifecycle. The largest companies by market capitalisation include United Company RUSAL (Russia), Rio Tinto PLC (UK), Alcoa Inc. (United States) and Aluminium Corporation of China Ltd (China).
Aluminium futures are traded on exchanges in London, New York and Tokyo. The most widely traded contract is the London Metal Exchange (LME) Aluminium futures (‘AH’). The underlying metal is high grade primary aluminium. The contract size is 25 tonnes and it is priced in US dollars per tonne. Ring trading hours are between 11:55-12:00/12:55-13:00 GMT (first session) and 15:15-15:20/15:55-16:00 GMT (second session). Global benchmark industrial metals pricing is set by LME trading and purchasers.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Aluminium ETPs can take two forms – physical or non-physical. Physical products attempt to provide investors with a return equivalent to the movements in the aluminium spot price (less management and storage fees). Non-physical (swap-based) products track indices that are constructed to simulate a continuous exposure to aluminium futures returns. It is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to aluminium futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to aluminium futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing aluminium futures exposure include Dow-Jones UBS Aluminium Subindex; Bloomberg CMCI Aluminium Index; S&P GSCI Aluminium Index; Barclays Capital Commodity Index Aluminium Pure Beta (United States)

Price

Figure 6: Aluminium Price Chart (US Dollars)

Source: Bloomberg


  • 1. World Bureau of Metal Statistics
  • 2. International Aluminium Institute, Global Aluminium Recycling: A Cornerstone of Sustainable Development
  • 3. Bloomberg
  • 4. Aluminium Federation, Aluminium in Building and Construction
  • 5. International Aluminium Institute, The Global Aluminium Industry

  


COPPER


Copper has a reddish appearance and is the world’s third most widely consumed metal after steel and aluminium. Copper is both malleable and ductile and resistant to corrosion. Copper’s value lies in its versatility: it is extremely conductive, and can be used for a wide range of applications independently or alloyed with other metals.

 
Copper production broadly is a three-step process – ore processing, smelting and refining. The processing of ore is undertaken at the mine site itself, whereas the smelting and refining is done off the mine site. Copper is predominantly mined by open pit method with the remainder mined underground. The process of smelting ensures the removal of impurities, for example, iron and sulphur, from the concentrate. The final production stage is electro-refining which results in the end product – refined copper. All copper traded on the London Metal Exchange is refined.

Copper has the highest conductivity of the major metals and thus is used widely in the development of electrical and electronic applications as well as in the generation of electricity and energy itself. Other end-uses of copper include air conditioning, coinage, construction, industrial machinery, telecommunication and transportation.

Market snapshot

Between 2002 and 2012 global mined production increased 26 per cent, with much of this growth driven by increased output in China and South America. Production in China and Peru has increased by 199 per cent and 54 per cent respectively during this ten year period. In contrast, growth has been marginal in developed economies like the United States and Australia, which both saw production increase only 4 per cent over the decade. In 2012 the top three producers accounted for approximately half of global production1.

Figure 1: Global Mined Copper Supply by Country, 2012

Source: Bloomberg

Global refined copper production is greater than mined production and has increased 33 per cent between 2002 and 2012. This growth has been driven by rising refined output in China which has increased 274 per cent in the last decade1.

Figure 2: Global Refined Copper Supply by Country, 2012

Source: Bloomberg

Demand for refined copper increased 34 per cent between 2002 and 2012. Over this period consumption in China increased 232 per cent. This contrasts with falling demand in developed nations like the United States, Japan and South Korea where consumption decreased 26 per cent, 15 per cent and 23 per cent respectively. In 2012, China demand represented 44 per cent of total world consumption of refined copper1.

Figure 3: Global Refined Copper Demand by Country, 2012

 Source: Bloomberg

Zwischen 2002 und 2012 nahmen die weltweiten Importe von raffiniertem Kupfer um 15 Prozent zu. China ist mit Abstand der größte Importeur von raffiniertem Kupfer und kam 2012 für rund 37 Prozent der gesamten Importe auf. Obwohl das Land auch der größte Produzent von raffiniertem Kupfer ist, stammen beinahe ein Viertel des in China verbrauchten Kupfers aus dem Ausland1.

Figure 4: Global Refined Copper Imports, 2002 - 2012 (Million Tonnes)

Source: Bloomberg

Die weltweiten Exporte von raffiniertem Kupfer stiegen zwischen 2002 und 2012 um 23 Prozent. Größter Exporteur war im Jahr 2012 Chile mit 31 Prozent der weltweiten Kupferexporte. Zum zweitgrößten Kupferexporteur stieg Sambia auf, nachdem das Land seine Exporte zwischen 2002 und 2010 um 129 Prozent gesteigert hatte1.
 

Figure 5: Global Refined Copper Exports, 2002 - 2012 (Million Tonnes)

Source: Bloomberg

Important factors and trends

Copper is a highly cyclical commodity because of its use in construction, industrial machinery manufacturing and power production. Given China accounts for a significant proportion of global demand, the price of copper is particularly sensitive to China manufacturing figures, as well as other developing nations located in Asia. Typically when emerging economies demonstrate high levels of economic growth, supported by rising industrial output, global demand for cyclical commodities like copper is strong.

Figure 6: Global Refined Copper End-use, 2012

Source: Bloomberg
The copper mining industry faces a number of specific constraints that have the potential to affect global output of mined copper. Falling copper ore grades is a significant problem more prevalent amongst more mature producers like Chile and the United States. Production from the world’s largest mine, Escondida in Chile, has been hit by falling ore grades, where average copper content of mined ore fell from 1.72 per cent in Q4 2007 to 0.97 per cent in Q4 20112 . This fall in grades not only affects production levels but also contributes to increased costs as more ore needs to be produced to achieve the same level of output.
Labour disputes in South America have plagued the mineral mining industries and have hurt copper output from the region. Production levels have fallen in key mines due to prolonged labour disputes as well as environmental concerns affecting local communities. Furthermore policy measures, including tax and regulation, have placed additional pressures on miners, all of which have the capacity to supress supply.
Inventories are a useful indicator of the supply and demand dynamics operating in the copper industry. Invariably changes in inventory levels mirror shifts in market conditions with any significant changes usually contributing to moves in the price of copper. Short-term changes in inventory levels may reflect cyclical fluctuations in production and consumption. Longer term inventory surpluses or shortages can imply more fundamental structural changes in global copper supply and demand, for example a fall in world consumption or comparatively a need to increase global production of copper.

Investing

Investors can gain indirect exposure to copper by investing in publically listed companies involved in the global mined copper production lifecycle. The largest companies include Codelco; Freeport-McMoRan Copper & Gold; BHP Billiton Ltd.; and Grupo Mexico.
Copper futures are traded in London on the London Metal Exchange (LME) with the LME copper futures the most widely traded contract. The contract code is ‘CA’ and the underlying metal is Grade A copper. The contract size is 25 tonnes and it is priced in US dollars per tonne. Ring trading hours are between 12:00-12:05/12:30-12:35 (first session) and 15:10-15:15/15:50-15:55 (second session).

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Copper ETPs can take two forms – physical or non-physical. Physical products attempt to provide investors with a return equivalent to the movements in the copper spot price (less management and storage fees). Non-physical (swap-based) products track indices that are constructed to simulate a continuous exposure to copper futures returns. It is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to copper futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to copper futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot of front-month futures price (as provided below).

Examples of indices providing copper futures exposure include Dow-Jones UBS Copper Subindex; S&P GSCI Copper Index; UBS Bloomberg CMCI Copper Index; Barclays Capital Commodity Index Copper Pure Beta (United States); SummerHaven Copper Index (United States)

Price

Figure 7: Copper Price Chart (US Dollars and Cents)

Source: Bloomberg  


  • 1. Bloomberg
  • 2. Financial Times, 2012

LEAD


Lead is a dense, ductile, malleable blue-grey metal that is highly resistant to corrosion. The metal has been used for at least 5,000 years, with early uses including building materials, pigments for glazing ceramics and pipes for transporting water. It is easily extracted from the earth, usually being found in ore with zinc, silver and copper.

Extraction of lead from the ore (primary processing) is typically a two-stage process – mining of the ore to produce concentrates and processing concentrates to produce refined lead. Secondary lead processing involves the processing of lead scrap, which may be mixed with alloys including copper, nickel and tin.

Lead’s high corrosion resistance makes it ideal for buildings; the high density makes it an effective barrier to radiation in hospitals and helps reduce noise in factories as well as in ships. More than 50 per cent of lead’s end use is for lead-acid batteries to provide power in vehicles and emergency power. At least three quarters of all lead used goes into products which are suitable for recycling, with over 50 per cent of lead consumed derived from recycled or re-used material.

Market snapshot

Between 2002 and 2012 global production of mined lead increased 81 per cent, driven by rising output of 343 per cent from China, making it the largest producer in 2012 (see figure 1). In stark contrast, the developed nations, which were traditionally the largest producers, have seen declines in output. The United States, which was the largest producer in 2002, has seen supply fall 23 per cent over the past decade and production in Australia has decreased 10 per cent1

Figure 1: Global Mined Lead Supply, 2012

image

Sources: World Bureau of Metal Statistics, USGS
Global refined production increased 58 per cent between 2002 and 2012, with China’s refined output increasing 251 per cent during this period. India’s refined lead production has increased 524 per cent, now accounting for 4 per cent of world refined supply making it the third largest supplier1.

Figure 2: Global Refined Lead Supply, 2012

Sources: World Bureau of Metal Statisitics, USGS
World demand for refined lead increased 57 per cent between 2002 and 2012. Consumption in China and India were the main drivers of this growth with demand increasing 388 per cent and 253 per cent respectively on the back of strong industrial output. In contrast, consumption in developed nations like Japan and Germany has dropped 8 per cent over this period1. In 2012 the largest three producers we China, United States and India (see figure 3).

Figure 3: Global Refined Lead Demand, 2012

Sources: World Bureau of Metal Statisitics, USGS

Less than 20 per cent of total refined lead output is traded internationally. This is less than other major metals, reflecting the importance of the secondary lead industry, which tends to serve local markets. The largest importer of refined lead in 2012 was the United States (see figure 4), which has seen an increase in imports of 34 per cent since 20021.

Figure 4: Global Refined Lead Imports, 2002-2012 (Million Tonnes)

 

Sources: World Bureau of Metal Statistics, USGS

The largest exporting region of refined lead in 2012 was Europe (see figure 5), accounting for around half of total world exports. Between 2002 and 2012 exports originating in Europe increased 46 per cent reflecting increased intra-European trade. In contrast, exports from China declined sharply in 2007-2008, and have remained low since, on the back of reduced production and increasing domestic consumption1.

Figure 5: Global Refined Lead Exports, 2002-2012 (Million Tonnes)

 

Sources: World Bureau of Metal Statistics, USGS

Important factors and trends

80 per cent of global end-use of lead is in batteries and in China 28 per cent of battery demand is specifically in automobile lead acid batteries1. Between 2005 and 2012 the use of lead in automobile production increased 238 per cent1, driven by increased domestic demand for motor vehicles. Demand for lead is therefore closely correlated with automobile manufacturing output. Increased demand for automobiles in China will usually result in rising demand for lead.

Figure 6: Global Lead End Use, 2012
 

Source: Bloomberg
Lead is a heavy metal, with high levels of toxicity associated with a number of environmental and health concerns. The major anthropogenic sources of lead-based emissions include fuel additives and coal combustion. In the mid-1990s fuel additives accounted for 74 per cent of lead emissions into the air2. Since then this figure has been reduced significantly as government mandates to reduce harmful emissions have driven the use of cleaner alternative additives. Additionally, the use of lead in water pipes is now widely prohibited owing to concerns about lead poisoning. Both environmental policy and health concerns may act to depress demand for lead in certain markets.

The development and marketing of substitutes for lead has increased over the past years given the environmental and health effects mentioned to above. Examples of common substitutions for lead based products include lithium-ion-polymer batteries, alternative gasoline additives and alternative pigments used in paint. Substitutions eat into lead market share which could potentially result in a reduction in demand.
The recycling of lead is a major component of global supply, with secondary production accounting for just over 50 per cent of global refined output3. Lead used in batteries is entirely recoverable which is significant given the majority of lead end-use is in batteries. The recycling of lead helps alleviate some environmental policy pressures but importantly it also contributes significantly to broader resource conservation in the supply chain and helps reduce overall production costs. The vast majority of lead output in western developed nations is through secondary processing. In contrast recycling of lead in emerging economies like China is proportionally much smaller but can be expected to grow as share of total output in the coming years.

Investing

Investors can gain indirect exposure to lead by investing in publically listed companies involved in the global mined lead production lifecycle. The largest companies offering some exposure include Glencore Xstrata PLC. (Switzerland); BHP Billiton Ltd. (Australia); Vedanta Resources PLC. (London); Boliden AB (Sweden).
Lead futures are traded in London on the London Metal Exchange (LME) with the LME Lead futures contract acting as the global benchmark for lead prices. The underlying metal is lead of 99.97 per cent purity (minimum). The contract size is 25 tonnes and it is priced in US dollars per tonne.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here).
Lead ETPs can take two forms – physical or non-physical. Physical products attempt to provide investors with a return equivalent to the movements in the lead spot price (less management and storage fees). Non-physical (swap-based) products track indices that are constructed to simulate a continuous exposure to lead futures returns. It is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to lead futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to lead futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing lead futures exposure include Dow-Jones UBS Lead Subindex; UBS Bloomberg CMCI Lead Index; Barclays Capital Commodity Index Lead Pure Beta (United States).

Price

Figure 7: Lead Price Chart (US Dollars)

Source: Bloomberg

  • 1. Bloomberg Industries
  • 2. World Health Organisation, Lead Review, 2003
  • 3. International Lead Association

COCOA

 

Cocoa grows on cocoa trees, which are generally found in rainforests and in countries near the Equator. Its origins can be traced to ancient South American cultures, only eventually finding its way into Europe through the Spanish colonies. The Europeans later introduced the bean to Africa, now today’s largest producer.

 

There are two types of cocoa beans – “fine or flavour” beans and “bulk or ordinary” beans. The latter has dominated most of the world’s production over the past five decades. The growing season for cocoa is continuous with the main harvesting period starting from September, which can extend into the first few months of a new year.

 

Cocoa is used across the world to create chocolate and other products like cocoa butter which is also used in a variety of pharmaceutical and cosmetic products.

Market snapshot

The production of cocoa is heavily concentrated in the African continent which made up 73 per cent1 of the market share in cocoa beans in 2010/11. Between 2002 and 2012 world output increased 28 per cent2, however supply can be volatile as output is particularly sensitive to a variety of environmental conditions. Between 2002 and 2012 annual growth rates have ranged from minus 10 per cent to 18 per cent2. The Cote d’Ivoire and Ghana were the two largest producers of cocoa beans in 2011-12 (see figure 1).

 Figure 1: Global Cocoa Bean Supply by Country, 2011-2012

Source: ICCO Quarterly Bulletin of Cocoa Statistics, Vol. XXXIX, No. 3, Cocoa year 2012/13

Global cocoa consumption is measured by grindings of cocoa beans, as manufacturers tend to process cocoa beans in accordance with demand for cocoa product. Between 2002 and 2012 demand increased steadily by 28.5 per cent2, its growth far less volatile than that of supply. The only recorded fall in consumption over the last ten years occurred in 2008/09 as demand dipped during the economic crisis. The largest processors of cocoa in 2011/12 were the Netherlands, Cote d’Ivoire and Germany (see figure 2). Although grinding is an accurate measure of the amount of cocoa processed, it does not reflect where end-products are consumed. In 2010/11 the largest consumers3 of cocoa were the United States (20 per cent), Germany (9 per cent), France (6 per cent) and United Kingdom (6 per cent).

Figure 2: Global Cocoa Bean Grinding by Country, 2011-12

 

 

Source: ICCO Quarterly Bulletin of Cocoa Statistics, Vol. XXXIX, No. 3, Cocoa year 2012/13
Between 2006 and 2011 net imports of cocoa beans increased by 11 per cent2, the largest importing countries being the United States, Germany and France (see figure 3). The largest regional trade is between Africa and EU, which accounted for 54 per cent2 of total world trade in 2010/11.

Figure 3: Global Net Importers of Cocoa Beans, 2006-11 (Thousand Tonnes)
 

Image

Source:International Cocoa Organization, The World Cocoa Economy: Past and Present, 2012
Total world exports of cocoa beans accounted for 87 per cent2 of total production in 2010/11, illustrative of relatively low consumption of cocoa in some of the largest producing countries. The largest exporting region of cocoa beans is Africa, accounting for 80 per cent2 of total world exports in 2010/11 (see figure 4).

Figure 4: Global Net Exporters of Cocoa Beans, 2006-11 (Thousand Tonnes)
 

Image

Source:International Cocoa Organization, The World Cocoa Economy: Past and Present, 2012

Important factors and trends

The supply of cocoa is particularly sensitive to weather conditions. ‘El Niño’ is a weather phenomenon that affects rainfall patterns in different parts of the world. Statistical analyses undertaken by the International Cocoa Organization indicate that El Niño has a significant negative impact on cocoa production, reducing annual global output on average by 2.4 percent4 . Figure 5 illustrates the impact of historical El Niño episodes on annual production figures.

Additionally, as areas of land are intensively cultivated, soil fertility levels can degrade over time. The threat of lower crop yields, which could be damaging to cocoa supply, can be mitigated through sustainable agroforestry techniques. Productivity can be improved through composting and the widespread use of fertilizer on cocoa-timber farms5. As developing countries continue to increase output, the adoption of sustainable farming techniques may be vital to protecting yields.

Figure 5: El Nino - Historical Episodes and Departure from Trend of Annual Production

 

Source: United States Department of Commerce, National Oceanic and Atmospheric Administration (NOAA), International Cocoa Organisation (ICCO)

Political instability in a number of large cocoa producing countries has the capacity to greatly influence global trade of cocoa. The disputed presidential election in Cote d’Ivoire, the largest producing nation, disrupted cocoa exports in 2010, coinciding with significant increases in the price of cocoa.
According to the World Cocoa Foundation an estimated 30-40 per cent of the crop is lost to pests and disease. Diseases have tended to be concentrated regionally with ‘Witches Broom’ and ‘Frosty Pod Rot’ affecting crops in South America and ‘Swollen Shoot Virus’ and ‘Vascular Streak Dieback’ concentrated in Africa. The ‘Black Pod’ disease is prevalent across Africa, South America and Asia and has resulted in an estimated 20-30 per cent of global yield loss6.
Over the past decade the cocoa processing and trading industry has gone through a significant period of concentration with the largest companies, Archer Daniels Midland’s (ADM), Barry Callebaut and Cargill, playing a dominant role in global cocoa trade. In 2010 the following companies comprised of approximately 40 per cent of the world cocoa processing industry2 with further consolidation having taken place since. It is unknown what effect this continued level of market concentration may have on the price of cocoa.

Investing

Investors can gain indirect exposure to the cocoa market by investing in equities. The vast majority of cocoa production occurs on privately held farms but investors can purchase shares in two or three of the largest cocoa processing companies that have some exposure to the industry. The three largest publically listed companies are Archers Daniel Midland, Barry Callebaut and Cargill.
The global benchmark for cocoa prices is the Intercontinental Exchange (ICE) Cocoa Futures, which trades under the symbol ‘CC’. The contract size is 10 tonnes and is priced in US dollars and cents per tonne. The delivery months for the contract are March, May, July, September and December. Trading hours are between 09:00-19:00 GMT (4:00am-2:00pm ET).

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’.
Cocoa ETPs track indices that are constructed to simulate a continuous exposure to cocoa futures returns. The cocoa spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to cocoa futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to cocoa futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing cocoa futures exposure include the Dow Jones–UBS Cocoa Subindex; UBS Bloomberg CMCI Cocoa; Barclays Capital Commodity Index Cocoa (United States).

Price

Figure 6: Cocoa Price Chart (US Cents)

 

Source: Bloomberg


  • 1. World Cocoa Foundation, The Cocoa Market Update, 2012
  • 2. International Cocoa Organization, The World Cocoa Economy: Past and Present, 2012
  • 3. Based in a measure described as “apparent consumption” which is calculated as grindings of cocoa beans plus net imports of cocoa products and of chocolate and chocolate products in beans equivalent (International Cocoa Organization, The World Cocoa Economy: Past and Present, 2012)
  • 4. International Cocoa Organization, ‘Impact of El Niño / La Niña Weather Events on the World Cocoa Economy’
  • 5. World Cocoa Foundation, Challenges
  • 6. International Cocoa Organization, Pests and Diseases

COFFEE

 

The origins of coffee can be traced to the mountains of Ethiopia. It was consumed throughout the Middle East region in the 16th Century and was later more widely distributed across Europe by Dutch suppliers. The coffeehouse culture quickly spread across Europe and the United States, with significant levels of coffee consumption in these regions still reflected today.

There are primarily two varieties of coffee traded globally – Arabica and Robusta. Typically, the Arabica variety has been the most highly sought after and is considered the premium coffee by a large majority of vendors. In contrast to the more delicate Arabica plant, the Robusta species is the hardier plant, less susceptible to disease. Typically, futures contracts provide exposure to one particular variety of coffee. For example, the Coffee C contract is the world benchmark for Arabica coffee.

Coffee ‘beans’ are actually the seeds of fruits that bear a close resemblance to cherries when ripe. Once removed from the fruit, the coffee beans are usually processed in one of two ways – dry processing or wet processing. The latter process, although more expensive, is considered to produce higher quality coffee.

Market snapshot

Between 2002/03 and 2012/13 the annual increase in production of Arabica coffee ranged between minus 22 per cent and 17 per cent1 , with five annual decreases recorded over the decade. This illustrates the volatility in global supply, which is very sensitive to environmental factors. Over the past decade world supply of Arabica coffee has increased by only 4 percent1. Brazil is the largest producer of coffee by some distance, accounting for 46 per cent1 of world Arabica production in 2012/13 (see figure 1).

 Figure 1: Global Arabica Supply, 2012/13

Figure 1

Source: USDA, Foreign Agricultural Service


Global consumption of coffee2 over the last decade has increased 25 per cent1, with a significant proportion of this growth attributable to rising demand in developing nations. Since the economic crisis in 2008, levels of demand in EU and the United States have shown only marginal increases. In contrast, over the same period of time, consumption in China has increased 268 per cent, Vietnam by 92 per cent and the Philippines by 54 per cent1. Over the coming years, if wages continue to increase in developing countries, this trend of increasing consumption could be expected to drive global demand.

Figure 2: Global Total Coffee Demand, 2012/13

Figure 2

Source: USDA, Foreign Agricultural Service
Between 2002/03 and 2012/13 global world imports increased 26 percent1. The largest net importers of coffee are the EU and the United States which account for 41 per cent and 21 per cent1 of world imports respectively (see figure 3). Brazil accounts for 30 per cent of EU imports and 25 per cent of US imports1. However over the last five years the increase in imports has been overwhelmingly driven by developing countries.

Figure 3: Top Importers of Coffee, 2008-2013 (Thousand 60-Kilogram Bags)

Figure 3

Source: USDA, Foreign Agricultural Service
Global world exports have increased 23 per cent over the last decade1. Although Brazil today accounts for over one quarter of world exports, other producers are increasing their exports, with Vietnam growing 53 per cent, India by 78 per cent and Ecuador by 95 per cent1 (see figure 4).

Figure 4: Top Importers of Coffee, 2008-2013 (Thousand 60-Kilogram Bags)

Figure 4

Source: USDA, Foreign Agricultural Service

Important factors and trends

Brazil is the largest producer of coffee accounting for nearly half of world Arabica production, with other large producing countries, like Indonesia and Vietnam, focusing primarily on Robusta production. Given this significant market concentration, any change to supply and demand dynamics in Brazil can have a major impact on world coffee trade and Arabica prices. The Brazilian government has in the past purchased excess supplies to support the market. Elevated production in Brazil has the capacity to depress prices, the risk of which is increased if government intervention does not take place.
Hemileia vastatrix, also known as roya or coffee leaf rust, is a fungus that attacks the leaves of Arabica bushes, reducing yields and in some instances killing the entire plant. Coffee leaf rust disease thus poses a major threat to coffee supply globally. The disease is prevalent in nearly all coffee producing areas, particularly across Central America where a reported 53 per cent incidence level in 2012/13 was the worst seen since the disease first spread to the region3. USDA forecasts for coffee production across Central America and Mexico in 2013/14 will see a decrease in regional output of 8 per cent due to lower yields1.
Coffee consumption is closely connected to the relative levels of disposable income held by consumers. Traditionally the consumption of coffee has been concentrated in developed nations. Over the coming years however, as wages continue to increase in developing countries, coffee consumption may grow significantly, particularly in important producer nations like Vietnam and Indonesia.

Investing

Investors may gain indirect exposure to the coffee market by investing in publically listed companies involved in the processing and commercial distribution of coffee. Examples of large companies offering some exposure include Nestle (who own Nespresso) and Starbucks. Tata Coffee (India) also provides indirect exposure to the Asian coffee market.
The two largest coffee futures exchanges are located in New York (Arabica) and London (Robusta). The global benchmark for Arabica is the IntercontinentalExchange (ICE) Coffee C contract which trades under the contract symbol ‘KC’. The contract size is 37,500 pounds and it trades in US dollars and cents per pound. The contract listings are March, May, July, September and December and the contract trades between 08:30-19:00pm GMT (3:30am-2:00PM ET). A Notice of Certification is issued based on testing the grade of the beans and by the cup testing for flavour. Coffees judged better are at a premium and those judged inferior are at a discount.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Coffee ETPs track indices that are constructed to simulate a continuous exposure to coffee futures returns. The coffee spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to coffee futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to coffee futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing coffee futures exposure include the Dow Jones–UBS Coffee Subindex; UBS Bloomberg CMCI Coffee; Barclays Capital Commodity Index Coffee (United States).

Price

Figure 5: Arabica Coffee Price Chart (US Cents)
 

Figure 5

Source: Bloomberg


  • 1.USDA, Foreign Agricultural Service, Coffee: World markets and Trade, June 2013
  • 2.Typically, Arabica and Robusta varieties of coffee are mixed prior to end consumption, therefore the demand statistics provided are representative of total coffee demand
  • 3.International Coffee Organization

CORN

 

Corn, or maize, is a hardy plant that grows in many different areas of the world and is a native grain of the American continents. Most historians have traced the origins of corn to Mexico, however it was the European presence in the Americas during the 15th and 16th century that resulted in the grain first being brought to Europe. Today corn is the most widely grown cereal crop in the world.

Corn is widely produced in a number of different climates and soils, however due to its cold intolerance it is best suited to more temperate conditions and is typically planted during the spring period. After the planted seed begins to sprout, it develops leaves and later a thick, fibrous stalk. Following a period of growth, pollination takes place, which is sensitive to both weather and soil fertility. Weeds compete with crop for moisture and nutrients and this is typically managed through the use of herbicide.

Corn is primarily used as livestock feed, with much of the remainder processed into a wide range of food and industrial products including fuel ethanol, adhesives, corn oil for cooking and margarine, sweeteners, and as a food for humans. In particular corn is known for its high starch content and this ensures that it is a staple food for many people across the globe. It is the primary ingredient in a number of commonly consumed items including porridge, morning cereals and tortillas.

Market snapshot

Over the last decade production of corn has grown 43 per cent1 . World supply is currently projected to grow 23 per cent2 between 2011/12 and 2022/23. The two largest producers in 2011/12 were the United States (US) and China, which combined made up 57 per cent3 of total world supply of corn (see figure 1). Over the next decade Chinese supply is currently forecast to increase 29 per cent and US supply by 24 per cent. The United States Department of Agriculture’s (USDA) projections for 2013/14 indicate global output increasing 12 per cent3 on the back of strong crops in the US, China and Ukraine.

Figure 1: Global Corn Supply, 2011-2012

Figure 1

Source: USDA, World Agricultural Supply and Demand Estimates
Over the last decade global demand for corn has increased 38 per cent3, with consumption projected to increase by just over 27 per cent2 up to 2022/23. In 2011/12 the two largest consumers of corn were the United States and China who combined made up over half of global demand (see figure 2). In the US demand is driven by the use of corn as livestock feed and in ethanol production, with consumption projected to increase 28 per cent2 by 2022/23. Consumption in China is predominantly driven by demand for livestock feed and domestic consumption of corn is projected to increase 35 per cent2 by 2022/23 with annual increases of 7 per cent3 in both 2012/13 and 2013/14.

Figure 2: Global Corn Demand, 2011-12

Figure 2

Source: USDA, World Agricultural Supply and Demand Estimates
World corn imports are projected to grow 25 per cent2 between 2011/12 and 2022/23. In 2011/12 the largest importers of corn included Japan, Mexico and South Korea with demand for meat driving imports amongst developed nation in the Asia region (see figure 3). China is currently a net importer of corn although they have previously been significant net exporters too. Chinese export policy is unpredictable given the influence of Government export subsidies and tax rebates. As such this has the propensity to contribute to market uncertainty.

Figure 3: Global Corn Imports, 2008-2013 (Million Tonnes)

Figure 3

Source: USDA, Foreign Agricultural Service
The United States is the largest exporter of corn, in 2011/12 making up one third of total world exports3. It is projected that between 2011/12 and 2022/23 US exports will increase 62 per cent2 catering for increased demand in developing countries. Although the US is a significant player in global corn trade, exports make a relatively small proportion of demand for US corn, meaning that domestic supply/demand relationships in the US largely dictate movements in the price of corn. Argentina, Ukraine and Brazil are all significant players in the export market also (see figure 4).

Figure 4: Global Corn Exports, 2008-2013 (Million Tonnes)

Figure 4

Source: USDA, Foreign Agricultural Service

Important factors and trends

The United States and China are the two largest holders of corn stocks in the world, however markets are particularly sensitive to changes in American levels because of its export capability. If US stock levels fall, or are projected to fall, prices in the market may react positively and vice versa (see figure 5).

Figure 5: United States End Stockpiles as a Percentage of Domestic Consumption

Figure 5

Source:USDA, World Agricultural Supply and Demand Estimates; Bloomberg:
Corn is also used in the production of ethanol-based fuels for internal combustible engines and is the main feedstock used in ethanol fuel production in the United States. Ethanol is generally considered to be a cheaper and cleaner alternative to petrol/gasoline and these properties are expected to drive production in the coming years. The US government has introduced a string of policies aimed at increasing the use of biofuels. Corn for use in ethanol made up around 37 per cent of total US corn production in 2011-20123.
The use of biotechnology in the production of corn is a controversial policy issue that has the ability to considerably impact the fundamentals of the commodity in the coming years. In the United States the adoption of insect resistant and herbicide tolerant varieties of the crop has been widespread, now accounting for over 75 per cent of planted corn. However, GM crop cultivation has faced considerable opposition in the EU, allowing countries like Brazil to export significant quantities of its non-GM crop to this large import market.
Corn is widely used in livestock feed across the world, and is the primary feed grain in the United States. The increased consumption of meat and poultry globally, especially in developing countries, has resulted in an increase in demand for livestock feed. As wages in developing countries continue to increase and animal farming methods become more efficient, consumption of meat in these countries could grow further.

Investing

Corn production is typically undertaken by farmers or privately owned companies, however, investors can gain indirect exposure by purchasing shares in agribusinesses which have some involvement in production lifecycle and trade of corn. For example, Monsanto and DuPoint are both involved in the production of genetically engineered corn seeds.
The two most prominent corn exchanges are the Chicago Board of Trade (CBOT) and Dalian Commodity Exchange (DCE) in China. The CBOT contract size is 5,000 bushels (approximately 127 metric tonnes) and it trades in March, May, July, September and December under the symbol ‘C’. The corn price is quoted in US cents per bushel. Weekday trading takes place between 8:30am – 1:15pm CT.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Corn ETPs track indices that are constructed to simulate a continuous exposure to corn futures returns. The corn spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to corn futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to corn futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing corn futures exposure include the Dow Jones–UBS Corn Subindex; UBS Bloomberg CMCI Corn; S&P GSCI Corn Index; Teucrium Corn Fund (United States).

Price

Figure 6: Corn Price Chart (US Cents)

Figure 6

Source: Bloomberg

  • 1.USDA, Foreign Agricultural Service
  • 2.USDA, Economic Research Service, 2013 International Long-Term Projections to 2022
  • 3.USDA, World Agricultural Supply and Demand Estimates

SOYBEANS

 

Soybeans are a species of legume native to East Asia. They are grown primarily in warm and hot climates and it was not until the early 20th Century that soybeans were cultivated significantly in Europe and the United States. Today processed soybeans are the largest source of protein feed and vegetable oil in the world.

Soybeans can grow in a wide variety of soil types and take between 80 and 120 days from planting to harvest. After harvesting soybeans are usually processed resulting in two by-products – soybean oil and soybean meal. The United States is currently the largest producer of soybeans in the world, with the majority of US output genetically engineered.

Soybeans are used to produce a wide variety of food products because of their high protein content. Soybean meal is the most valuable component obtained from processing the soybean, ranging from 50 per cent to 75 per cent of its value. Livestock feeds account for 98 per cent of soybean meal consumption, with the remainder used in human foods such as bakery ingredients and meat substitutes. Soybeans, soybean meal and soybean oil can all be traded separately.

Market snapshot

In the last decade world production of soybeans has increased 36 per cent1, with global output projected to increase 44 per cent2 between 2011/12 and 2022/23. Cumulatively the top three producers, United States, Brazil and Argentina, made up 80 per cent3 of total world production in 2011/12 (see figure 1). Over the next decade much of the increase in the global production is expected to be driven by output from South America with supply projected to increase 74 per cent2 in Brazil and 73 per cent2 in Argentina. Production in China is forecast to decrease 22 per cent2 over the same period of time.

Figure 1: Global Soybean Supply, 2011/12

Figure 1

Source: USDA, World Agricultural Supply and Demand Estimates
Global consumption of soybeans has increased by 35 per cent1 in the last decade, with demand projected to increase by 36 per cent2 between 2011/12 and 2022/23. The world’s largest consumers of soybeans are China, United States and Brazil which combined make up 63 per cent3 of world demand in 2011-2012 (see figure 2). Over the next decade consumption in China is projected to increase by 58 per cent2 and demand in Brazil and Argentina by 30 per cent2 and 41 per cent2 respectively. This contrasts to a more modest increase of 14 per cent2 in US consumption.

Figure 2: Global Soyabean Demand, 2011/12

Figure 2

Source: USDA, World Agricultural Supply and Demand Estimates
Since 2000/01 soybean imports has increased 82 per cent1, with future imports projected to increase a further 60 per cent2 over the next decade. China is currently the biggest player in the trade of soybeans (see figure 3). In 2011/12 China’s imports of soybeans accounted for 63 per cent of total world imports, with the country’s share in 2022/23 projected to increase to 71 per cent2. Consequently the market price of soybeans may be very sensitive to changes in Chinese demand.

Figure 3: Global Soybean Imports, 2009-2013 (Million Metric Tonnes)

Figure 3

Source: USDA, Foreign Agricultural Service

The two most dominant exporters of soybeans are Brazil and the United States (see figure 4). Between 2011/12 and 2022/23 exports from Brazil are projected to increase 76 per cent2 in contrast to the US, where forecasts expect exports to grow 18 per cent2. Although Argentina is only the third largest exporter of soybeans, it is the largest exporter of soybean meal and oil.

Figure 4: Global Soybean Exports, 2009-2013 (Million Metric Tonnes)

Figure 4

Source: USDA, Foreign Agricultural Service

Important factors and trends

Genetically modified (GM) soybean crop is a large influence on the global soybean market. In the US GM soybean acreage increased from 17 per cent to 93 per cent between 1997 and 20134 (see figure 5). There is still considerable scepticism amongst major importers about the adoption of biotechnology in crop cultivation, which has helped to boost non-GM export of soybeans from South America in particular.

Figure 5: Adoption of Genetically Engineered Soybean Crop in the United States as a Percentage of Planted Acres, 1996-2013

Figure 5

Source: USDA, Economic Research Service

Soybean rust is a serious disease that affects soybeans and has been responsible for crop losses around the world. The disease was first reported to have spread to South America in 2001 and was found for the first time in the United States in 20045 . At the beginning of November 2013 soybean rust has been detected in 13 states in the US primarily affecting the south-eastern parts of the country6 . With the US and the South American region accounting for over 80 per cent of total world production the spread of this disease could significantly impact global supply.
Soybean is a major feedstock for the production of biodiesel and although smaller than ethanol production it is an alternative biofuel source that is growing in the United States and Europe. Biodiesel can be used in diesel engines and is cleaner than more traditional sources of fuel. Governments attempting to reduce greenhouse gas emissions have introduced policy measures incentivising greater use of biodiesel helping to support demand.
The price of soybeans should also be considered in the context of its two by-products – soybean oil and soybean meal. The ‘crush spread’ is a trading strategy used by traders to manage risk by combining soybean, soybean oil and soybean meal futures positions to establish a processing margin. Both by-products have their own supply and demand chain and also share a relationship with each other.

Investing

Investors may gain exposure to the soybean industry through agribusinesses that have some involvement in the production lifecycle and trade of soybean. Publically listed companies offering some soybean exposure include Bunge Limited and Archer Daniels Midland Company. Additionally, Monsanto produces genetically engineered soybean seeds.
Soybeans are traded on exchanges across the world, however the CME Group Chicago Board of Trade (CBOT) Soybeans Futures is taken to be the main indicator of soybean price changes. The contract size is 5000 bushels (approximately 136 metric tonnes) and the contract months are January, March, May, July, August, September and November. It trades under the symbol ‘S’. Soybean futures are quoted in US cents per bushel, soybean meal futures in US dollars per short tonne, and soybean oil futures in US cents per pound. Weekday trading takes place between 8:30am – 1:15pm CT.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Soybeans ETPs track indices that are constructed to simulate a continuous exposure to soybean futures returns. The soybeans spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to soybeans futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to soybeans futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing soybeans futures exposure include the Dow Jones–UBS Soybeans Subindex; S&P GSCI Soybeans Index; UBS Bloomberg CMCI Soybeans Index; Teucrium Soybean Fund Benchmark Index (United States)

Price

Figure 6: Soybeans Price Chart (US Cents)

Figure 6

Source: Bloomberg


  • 1.UDSA, FAS, World: Soybeans and Products Supply and Distribution
  • 2.USDA, Economic Research Service, 2013 International Long-Term Projections to 2022
  • 3.USDA, World Agricultural Supply and Demand Estimates
  • 4.USDA ERS, Adoption of Genetically Engineered Crop in the US
  • 5.USDA, Agricultural Research Service: Invasive and Emerging Fungal Pathogens – Diagnostics Fact Sheets
  • 6.USDA, Pest Information Platform for Extension and Education

SUGAR

 

Sugar, also known as sucrose, is a member of the larger group of compounds called carbohydrates, and is characterised by a sweet taste. Sugar was first produced on the Asian continent and became more widely distributed across the world through the Spanish and Portuguese colonies. Christopher Columbus was responsible for taking sugar to the Caribbean, from where production spread to Brazil, today’s largest supplier.

Sugar comes from two sources – sugar cane and sugar beet. Sugar cane is a hot weather plant and is located in parts of South Asia, South America and the Caribbean basin. Sugar beets are grown in more temperate regions, with significant production in Europe. About 75 per cent of sugar produced is processed from sugar cane. Raw sugar and refined (white) sugar are two different products that are both traded internationally. Sugar beet producing countries export refined sugar, while sugar cane producing countries export either raw or refined sugar. The margin between raw and white sugar is known as the white premium.

Although primarily used as a food commodity for household and industrial purposes, sugar is also an efficient feedstock for ethanol distillation. 

Market snapshot

Between 2008 and 2013 the global supply of sugar increased 22 per cent1, with much of this growth driven by increased output from the largest producing countries. Over this period, output in Brazil increased 21 percent and in India 71 per cent1. In 2012/13 the largest producers of sugar were Brazil, India and European Union (see figure 1). Between 2013 and 2022 world production of sugar is projected to grow approximately 1.9 per cent per annum driven by moderate yield increases2. It is worth noting that supply of sugar is sensitive to weather conditions, with the monsoon season in India often causing erratic annual supply levels.
Figure 1: Global Sugar Supply, 2012/13
etf_fig1_sugar_v2-01
Source: USDA, Foreign Agricultural Service
Between 2008 and 2013 world demand of sugar increased by 15 per cent1, with significant growth in the Asian region. In these five years consumption in Thailand increased by 30 percent, India by 23 per cent and China by 20 per cent1. European consumption during this period has been more modest, growing by 15 per cent1. In 2012/13 the largest consumers of sugar were India, European Union and China (see figure 2). Over the next decade global consumption of sugar is projected to increase by approximately 1.9 per cent annum with much of the demand driven by the sugar-deficit regions of Africa and Asia2.
Figure 2: Global Sugar Demand, 2012/13
etf_fig2_sugar_v2-01
Source: USDA, Foreign Agricultural Service
Global imports between 2008 and 2013 increased by 23 per cent1. This was predominantly driven by trade in Asia, where imports have helped meet growing consumption of sugar based products. In particular, imports in China grew 253 per cent1 over this five year period. In contrast, imports in the EU and United States, the two largest importers of sugar (see figure 3), have been muted showing only marginal growth.
Figure 3: Global Sugar Imports, 2008-2013 (Million Tonnes)
etf_fig3_sugar_v2-01
Source: USDA, Foreign Agricultural Service
In 2012/13 global exports made up 32 per cent of total production1. There are a handful of major players in the export market, however Brazil is the dominant force, comprising just under half of world exports in 2012/131 (see figure 4). Significant annual changes to production in India have moved them periodically from the largest importer to the second largest exporter. This volatility has added considerable variability to world sugar markets. Over the coming years export growth is expected to be driven by sugar cane producers in developing countries including Brazil and Thailand.
Figure 4: Global Sugar Exports, 2008-2013 (Million Tonnes)
etf_fig4_sugar_v2-01
Source: USDA, Foreign Agricultural Service

Important factors and trends

Bioethanol can be produced through the fermentation of sugars to make pure ethanol which can be used as a fuel in motor vehicles. Brazil is the largest producer of sugar cane based ethanol, with nearly half of its sugar output used in ethanol production for domestic consumption. The removal of US tariffs on Brazilian cane based ethanol imports and intergovernmental energy policies promoting the use of renewables could drive growth in the biofuel industries and specifically bioethanol exports from Brazil.
Figure 5: Sugarcane Bioethanol Production in Brazil, 1990-2010 (Million Tonnes)

Source:USDA, Economic Research Service
The Intercontinental Exchange estimates that less than 50 per cent of world sugar trade occurs in a free market . The international sugar market is dominated by government subsidies on domestic production and tariffs imposed on foreign trade. US policies include domestic market controls and tariff-rate quotas that strictly control foreign imports. The European Union’s Common Agricultural Policy is another example of a protectionist trade barrier with EU based sugar producers incentivised, through significant subsidies, to oversupply the market.
Sugar substitutes, like high fructose corn syrup (HFCS), a sweetener used in popular beverages, compete with sugar for use in a variety of end products. Between 2013 and 2022 demand for HFCS is projected to increase by 15 per cent2, potentially eating into sugar market share. As health policies in a variety of developed and developing economies address the growing concern of obesity, the use of sweeteners as an alternative to sugar may gain more traction.

Investing

Investors can gain indirect exposure to the sugar market by investing in publically listed companies involved in the production of sugar. Some of the largest sugar-producing companies in the world include Suedzucker AG (Germany), Cosan Ltd. (Brazil) and Associated British Foods (UK) – owners of British Sugar PLC.
The two largest futures exchanges are in New York (raw sugar) and London (white sugar). The ICE Sugar No. 11 contract is the global benchmark for raw sugar trading and trades under the symbol (‘SB’). The contract size is 112,000 pounds and is priced in US dollars and cents per pound. The contract listings months are March, May, July and October and trading hours are between 07:30-19:00 GMT (2:30am-2:00pm ET).

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Sugar ETPs track indices that are constructed to simulate a continuous exposure to sugar futures returns. The sugar spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to sugar futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to sugar futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing sugar futures exposure include the Dow Jones–UBS Sugar Subindex; UBS Bloomberg CMCI Sugar; Barclays Capital Sugar Pure Beta Index; Teucrium Sugar Fund (United States).

Price

Figure 6: Sugar Price Chart (US Cents)

etf_fig6_sugar_v2-01

Source: Bloomberg


  • 1. USDA, Foreign Agricultural Service, World Sugar Production, Supply and Distribution
  • 2. OECD-FAO Agricultural Outlook 2013-2022
  • 3. IntercontinentalExchange, Sugar No. 11 and Sugar No. 16 

WHEAT

 

Wheat is a cereal grass that is currently widely produced across the world. It has historically been grown in temperate regions and has been cultivated for food since prehistoric times. As different communities increased usage of what was originally a wild grain, new varieties of wheat were cultivated to ensure more sustainable supplies.

Each type of wheat – Soft Red, Hard Red, Durum and White to name a few – requires different conditions for growth and as a result the production mix differs across countries. The soft red winter variety is generally grown in more humid environments, not suited to hard grain production. Winter wheat in the United States is planted from September to December and harvested in early July.

Wheat is mainly used as a human food and supplies approximately 20 per cent of food calories for the world’s population. The protein found in wheat, referred to as gluten, makes the crop extremely versatile and is a significant protein source for large proportion of the world population. The main use for wheat is flour, but it is also used in brewing and distilling, and to make oil, straw for livestock bedding, livestock feed, hay, newsprint, and other products.

Market snapshot

Over the last decade global wheat production increased 15 per cent1 , with supply projected to grow 15 per cent2 between 2011/12 and 2022/23. The European Union and China are currently the two largest producers of wheat (see figure 1). In the last decade supply of wheat in China has increased 34 per cent1 in comparison to EU production which has grown only 7 per cent1. Although production across the former Soviet Union region3 fell 33 per cent4 in 2011/12 following extreme weather, over the next decade this group of nations is expected to make up a significant proportion of the increase in global production.
Figure 1: Global Wheat Supply, 2011-2012 (Million Tonnes)
supply_etf_fig1_wheat_v2-01
Source: USDA, World Agricultural Supply and Demand Estimates
Between 2002 and 2012 global consumption of wheat has increased 13 per cent1, with demand projected to increase 11 per cent2 over the next decade. The three largest consumers are the EU, China and India which combined make up just under half of total world consumption (see figure 2). Demand in China has increased 34 per cent2 in the last decade driving global wheat demand. Trends indicate growing consumption of wheat amongst developing nations, in stark contrast to the United States where demand is projected to decrease sharply in 2013/14 and 2014/15 and remaining static thereafter up to 2022.
Figure 2: Global Wheat Demand, 2011-2012 (Million Tonnes)
etf_fig2_wheat_v2-01
Source: Source: USDA, World Agricultural Supply and Demand Estimates

World wheat trade, unlike that of corn and soybeans, is more evenly represented worldwide with no single country representing more than 10 per cent1 of total imports (see figure 3). World wheat trade is projected to grow 16 percent2 between 2013/14 and 2022/23 with imports concentrated in developing countries. In 2022 it is projected that Egypt will remain the largest importer, with a significant proportion of the increase in world imports driven by countries in Africa and the Middle East. China is not currently a regular importer of wheat, relying largely on domestic production, however given the significant levels of demand in the country prices would be very sensitive to a change in China’s fundamentals.

Figure 3: Global Wheat Imports, 2008-2013 (Million Tonnes)

Source: USDA, Foreign Agricultural Service
The former Soviet Union region currently accounts for 25 per cent1 of total world exports. Over the next decade exports from traditional export nations like the US and Canada are expected to either remain static or fall. EU exports are, however, projected to increase well above levels of the last decade. Exports from Russia, Ukraine and Kazakhstan are projected to increase by 55 per cent2 by 2022 driving the projected increase in global wheat exports.
Figure 4: Global Wheat Exports, 2008-2013 (Million Tonnes)

Source: USDA, Foreign Agricultural Service

Important factors and trends

Based on USDA projections2, by 2023 Russia may be the top exporter of wheat and the cumulative total export of wheat from the former Soviet Union region could represent almost double the exports from the United States (see figure 5). If USDA projections are realised this could have a significant impact on world wheat supply. However, due to the region’s unpredictable weather and variable yield, year-to-year volatility in production and trade can be expected.
Figure 5: United States and Former Soviet Union Projected Wheat Exports, 2011-2023 (Million Tonnes)
etf_fig5_wheat_v2-01
Source: USDA, Economic Research Service, 2013 International Long-Term Projections to 2022
There are two important factors driving emerging market demand for wheat – rising populations and growing incomes. It is projected that an extra billion tonnes of cereals will be needed by 2030 to feed a world population of 8.7 billion5. Furthermore with growing incomes and more expensive culinary tastes, wheat usage for livestock feed may well increase, potentially forcing developing economies to become reliant on imports from developed nations managing wheat surpluses.
At various points in time China, Russia, Ukraine and Kazakhstan have imposed tariffs on imports and limits on exports creating imbalances in global supply. Given the importance of this group of nations to global supply and exports, the imposition of protectionist policies may support wheat prices as markets factor in a potential tightening in global trade.
The fundamentals of wheat, and indeed most agricultural commodities, are heavily influenced by an underlying variable - weather. Extremely wet or dry conditions can negatively impact harvest yields resulting in a tightening of supply and an increase in the price of wheat. Heatwave and forest fires in 2012 decimated crop across the former Soviet Union region resulting in a significant reduction in production and exports. The price of wheat increased by 25 per cent over a one month period between June-July 2012.

Investing

Investors may gain exposure to the wheat industry through agribusinesses that have some involvement in the production lifecycle and trade of wheat. Publically listed companies offering some wheat exposure include Archer Daniel Midland and Bunge, both of which are currently headquartered in the United States.
Wheat futures are most commonly traded on the CME Group Chicago Board of Trade (CBOT) under the symbol ‘W’ in lots of 5,000 bushels (approximately 136 metric tonnes). The basis grade for these contracts is the soft red winter wheat, which itself is often referred to as “Chicago Wheat”. Wheat futures traded on the CBOT are used as the benchmark for wheat prices generally and are quoted in US cents per bushel. The contract months are March, May, July, September, and December. Weekday trading hours are between 8:30am – 1:15pm CT.

Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold (an upward sloping futures curve) which would have a negative impact on investment returns. This is often called ‘contango’. Alternatively the contracts being purchased may be cheaper than the ones being sold (a downward sloping futures curve) which would have a positive impact on investment returns. This is often called ‘backwardation’. The cost/benefit of rolling between futures contracts is commonly referred to as ‘roll yield’. (For more details please refer to our ETPedia by clicking here)
Wheat ETPs track indices that are constructed to simulate a continuous exposure to wheat futures returns. The wheat spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to wheat futures returns, the returns will include the benefit (if the curve is in backwardation) or cost (if the curve is in contango) of rolling futures to maintain exposure to wheat futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price (as provided below).

Examples of indices providing wheat futures exposure include the Dow Jones–UBS Wheat Subindex; S&P GSCI Wheat Index; UBS Bloomberg CMCI Wheat Index; Teucrium Wheat Fund Benchmark Index (United States).

Price

Figure 6: Wheat Price Chart (US Cents)

 etf_fig6_wheat_v2-01

Source: Bloomberg


  • 1. USDA, Foreign Agricultural Service
  • 2. USDA, Economic Research Service, 2013 International Long-Term Projections to 2022
  • 3. Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan
  • 4. USDA, World Agricultural Supply and Demand Estimates
  • 5. FOA, World agriculture 2030