Commodity investment objectives:

• Potential for returns;
• Portfolio diversification.
• Inflation protection.

Commodity spot prices are determined by supply and demand. Supplies of commodities are determined by production and inventory levels. The supply levels cannot be adjusted quickly. Demand levels are influenced by global manufacturing dynamics and economic growth.

Weather is a unique and exogenous risk for farmland and timberland. Global international competition environment can also cause interruptions in crop prices.

Diversification Benefits

Commodities are effective inflation hedges. In fact, some commodity prices are included in inflation calculations.

Because of the low correlation between commodities returns and traditional asset classes' returns, commodities are effective in portfolio diversification.

For some investors, there are ESG considerations by including timberland and farmland in their portfolios, as timber and crops consume carbon as part of the plant life cycle.

Instruments

Commodity investment may involve investing in actual physical commodities or in producers of commodities. However, most investors do not want to get involved in storing commodities such as cattle or crude oil. Typically, such investments are made using commodity derivatives (futures or swaps), which can be traded on exchanges or OTC.

There are also other means of achieving commodity exposure: Exchange-traded products (ETPs), CTAs, and funds that specialize in specific commodity sectors.

Investment funds are primary investment vehicles for timber and farmland.