commodities final

8/2/2019 Commodities Final

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Commodities as an asset class in integral to the completion of investment puzzle

Fixed Deposit

Real Estate

Mutual Fund

Equities

Cash

Commodities

Insurance

Submitted by:Aditi Mehra

Anushka SrivastavaKaustubh SalviSrishti Dalani

Varun Chaudhari

Commodities


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Commodities: you have probably heard the term before, but what does it reallymean? Simply, commodities are goods like beef, gold or lumber. When farmersand other producers put their goods up for sale they are selling commodities.

Example : Corn selling at 3.25$/bushel , which rises later to 3.55$/bushel

Trading can be done in different ways

Spot Trading Forward Contracts Future Contracts ( features of forward contracts) Hedging


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Commodity at a glance


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PRODUCTCommodity futureFactors affectingcommodity pricesChargesDelivery process

PARTICIPANTFarmers/ProducersTradersImportersSpeculatorsHedgersArbitragers

RISKLimitCover

Commodity Market


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RICE

Commodity Info:-1.Rough rice futures are traded on Chicago

Board of Trade under ticker symbol RR.2. Rough rice futures are delivered every year inJan, Mar, May, July, Sep & Nov.3. Rice is the cereal grain one of the mostconsumed food stuff in world.

Why Rice?Due to Thai flooding there could be severe croploss, result decrease in supply.Due to Fukushima nuclear radiation leak, riceproduced in Japan is considered to haveradiation exposure. Which again results in lesssupply.

Egypt government will issue tenders to importrice if local produce keep on stocking upcommodity. Result could be increase indemand.Influence of Asian Cuisine and increasingpopulation, results increase in Demand.

Risk Factor :-More demand expected and less supply

according to current Rice production conditionswhich implies Risk is average for rice

commodity.


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Wheat

Commodity Info:-Wheat futures are traded on Chicago Board of

Trade under ticker symbol W.Wheat futures are delivered every year in Mar,May, July, Sep & Dec.Wheat is the most important grain inthe world.

Why Wheat?US exports for wheat with constant supply ratesuggest increase in global demand. UN's severe warning of flood in China suggestdecrease in supply for wheat. Combination of widespread of hunger,increasing population and very sensitive to

wheat rust results increase in Demand. Currently Wheat future prices are undervalued,which will encourage to buy wheat thusincreasing the future price of wheat.

Risk Factor :-Undervalued wheat future prices with wheat astaple food of many countries it carries large

demand. But due to highly sensitive to weatherconditions and to wheat rust there could beless supply. Considering these facts wheatseems to be have low risk with current price ofwheat futures.


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Sugar/Corn as a BioFuel (Ethanol)

Why is Sugar a powerful commodity?

Used in both Food(Sweetening agent) and Bio-fuels(Ethanol) thus giving it a veryhigh edge for investment and higher returns.

CORN

United States makes almost all of its ethanol from corn. Corn is also used to produce High Fructose Corn Syrup which is used as

a sweetener. It has become a popular ingredient in sodas and fruit-flavored drinks

SUGAR

Brazil relies on sugar as a source of ethanol. Sugar has become a popular buy among investors, as significant volatility in spot

prices creates opportunities to capture material returns over a relatively short

period of time. While sugar may seem like a strange investment, it is aninternational commodity It trends well, however, making it a good prospect for investors with a little time

to wait. It has become a popular ingredient in sweets/candy/etc.


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Cont.

Sugar /Corn Price Drivers

Weather Conditions Geopolitical Tensions Regulatory Environment

Best Way To Invest Through the purchase or sale of a

sugar futures contract.

Brazil and other South American countries have found sugar-based ethanol to be moreefficient and cost effective.


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Cotton- White Gold

Cotton is a basic crop that is a major input forthe textile, agriculture, and food industries

The U.S. is a major cotton producer, but itsdomestic textile industry is relatively small, soit exports much of the cotton it produces.

Cotton #2 is traded on the New York Board ofTrade under ticker symbol CT

Why Cotton?

Strong Supply and Demand Growth (10%and 15% respectively for next 1 year. Mostof this growth due to China

All time requirement of new clothing, yarn,thread

Demand and driver of cotton prices(seasonal growing conditions, prices of

competing crops)

Factors that Drive Cotton Price:- Grain Price Cottonseed prices Climate: Synthetic fabrics: Substitutive

Commodity

Risk Factor:- Stocks/Use Ratio has increased from 39.5%(2010)

to 48.1%(2011)

The projection suggest the cotton price will not godown, but instead it might increase.

Cotton prices are likely to come under furtherdownside pressure with supply prospects lookingrobust in three of the worlds four largestproducers, while the decline in prices

Risk is minimal to average


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Coffee-The sacred bean

Second most valuable legal exportedcommodity

Majority Coffee Import- USA, Germany and

Italy Majority Coffee Exports- Brazil, Vietnam(80%

of foreign exchange earnings) Coffee is traded on

major futures and commodity exchanges,most importantly in London and New York

Robusta is typically sold for 70% of the priceof Arabica, thus favored by (Starbucks, Kraft,P&G, Sara Lee)

Why Coffee? Coffee is a key cash crop in various

developing countries. Coffee accounts for60% of Ethiopia's exports. The current beliefis that more than 100 million people in thesecountries depend on coffee as their primarysource of income

High market growth rate: Increase in 10%over the period of last 2 years

High Consumption Rate: 120-140 millionbags a year

Factors that drive Coffee's price:- Weather Supply and Demand Fundamentals Arabica vs. Robusta

Risk Factor :-Coffee future have doubled in the last year,closing at $2.46 per pound in early 2011.That's the highest price since May 1997,when coffee was trading at $3.20 per pound.Thus, risk is average


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Crude OilCommodity Info:- Crude Oil is the oil directly from the

underground and has to be refinedbefore it can be used.

It varies in physical appearance fromLight to Heavy and classifiedaccording to its measured APIgravity.

Why Crude oil? Crude oil ends up in being volatile in

nature. This volatility and pricemovement is needed in order to gaindecent profits in trading world.

Money can be made form crude oil.Better chances of higher profits withless risks.

The largest pension fund in theworld is also known as oil fund.

There is normally an increasingtrend for oil future prices.

Risk Factors-The chart above shows thecontinual front-month futures contractfor Light, Sweet, Crude Futures traded onthe NYMEX who Benefits from Rising OilPrices is alternative energies like wind,

solar etc, hybrid car manufacturers likeToyota and Honda. Independent oil andgas companies and oilfield services. Theloses will be reflected as Rising oil pricesreduce consumer demand for productsthat consume oil. It will make travel and

shipping more expensive.


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Platinum

Commodity Info:-

Platinum is an exceedingly rare andprecious metal found in only a fewdeposits worldwide.

About half of all global platinumconsumption is for the manufactureof automobile catalytic converters.

Why Platinum? Its relative scarcity and wide array of

uses, it is often in high demand.

Platinum can be bought through fundson the exchange, foreign accounts forclaims or as bullion. It just depends

upon your specific investmentpractices and your comfort level.

Platinum stocks, mutual funds, ETFsand futures are investments that canprovide promising returns, in spite ofthis they are inadvisable for beginnersbecause these investments are

complicated and very treacherous.

Risk Factors-The chart above shows continuous front-month futures prices for Platinum traded

on the New York Mercantile Exchange.With gold trading at over 10% premium

against platinum, the ratio between theseprecious metals feel to 0.88 its lowestsince 1985.Gold was trading at $1720/ozon whilst platinum was at $1520 as ofTuesday.


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Commodities are an obvious candidate for attention because they haverisen so much over the past decade.

Gold- effective hedge against inflation when the dollar depreciates,demand for gold increases

During times of economic and political uncertainty, the demand for Gold

rises due to its high intrinsic value and relative stabilityDemand for gold has been rising, supply has been dropping as many ofthe top gold producing countries have had decreasing production over thepast few years


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- gold price were at approx 25 dollars in 1968-started moving up since 1973 oil crisis

-again peaked in 1980 during the Iran -Iraq war

-since the dot com bubble burst the gold price has moved from 400

dollars to almost 1300 dollars

-which is more than 3 times of price in 2001.


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How much to invest in gold? One can invest up to 5 -10 % of ones portfolio in gold more than 10% of the portfolio in gold-for the people who have a very low risk level

How to invest in Gold? Physical -in the form of gold bullion bars, contemporary gold coins, gold jewelry(you might

want to consider getting a safety deposit box) ETF- also called as paper gold

Gold ETF is a kind of mutual fund which is open ended and which is also available on

stock exchanges for trade. Gold miners stocks-

Types of companies-juniors : produce less than 200,000 troy ounces in a year-Medium-sized producers :manufacture between 200,000 and one million ounces-large-cap company : produce over a million a year

Risk and Return Portfolio can consists of the gold shares of a single large-cap company- usually offer slow

but safe growth, together with a safe dividend To minimize company-specific risks- diversify the portfolios Invest in young exploration companies- investments carry risk


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Natural Gas Natural gas is a combustible mixture of

hydrocarbon gases (methane, ethane, propaneetc)

Help power the world, be it throughfueling transportation, electricity generation andresidential/industrial heating

Future Natural Gas contracts for North Americaare traded on the New York Mercantile Exchange

Most of that supply rests outside US borders(96.7% for natural gas). Until the middle of 2008,natural gas prices were skyrocketing, driven byhigh oil prices, stabilizing or declining gas reservesnear high-consuming countries

Why Natural gas?

Natural gas is much cleaner - per unit of energy its

combustion produces 30% less carbon dioxidethan oil, and about 45% less carbon dioxide

than other substitutes.

Factors affecting the price of Natural Gas

Oil supply demand and pricing

Natural Gas supply and demand

Weather fluctuations

Drilling and storage

Risk Factor:-

At the New York Mercantile Exchange,the near-month (January 2012) futurescontract fell from $3.550 per MMBtulast Wednesday to $3.421 per MMBtuyesterday.Working natural gas in storage fell by20 billion cubic feet (Bcf) for the weekending December 2, according to EIA's

Weekly Natural Gas Storage Report(WNGSR. So risk level is medium tohigh


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Summary & Recommendations

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Distribution of Commodity Future

Commodity Pct.%

Gold 20%

Platinum 15%

Corn 10%

Sugar 10%

Crude Oil 20%

Rice 5%

Wheat 2%

Cotton 3%

Natural Gas 10%

Coffee 5%

TOTAL 100%

Commodity Factor Recommendation

Gold/Platinum Gold-Increased market volatility boostsgolds safe-haven status. Supplyextremely tight, accompanied by rising

production /High global platinumconsumption

Highlyrecommendable

Corn/Sugar Demand trends look positive for Sugar asBarclays forecast a 2.1% y/y rise indemand for the commodity in 2011-12/

Medium-High level

Rice/Wheat In 2012 Wheat prices may decline to610/bushel from 631, according to

Barclays in a report. Macro concernsaside, the wheat market could faceadditional pressure from improved cropconditions and export competition. Riceseems to be a stronger commodity due tostrong demand

Low-Medium

CrudeOil/Natural Gas

Projections predict a slump in price ofnatural gas and seems to get lowerfurther.Crude oil will be in demand even thoughthe price will increase

Crude Oil-HighNatural Gas-Low

Coffee Coffee will have High market growth ratedue to high consumption rate

Coffee-Medium

Cotton Cotton prices are likely to come underfurther downside pressure with supplyprospects looking robust in three of theworlds four largest producers, while the

decline in prices

Cotton-Low

commodities final

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