Natural Resources

Raw land, timberland, and farmland are characterized by their unique, illiquid nature with distinct geographic features. They offer potential for price appreciation, lease revenue, and direct revenue from natural resources like crops and timber.

Unlike traditional real estate that values physical improvements, investments in raw land, timberland, and farmland focus on the quality of natural resources such as soil and timber quality. Location relative to transportation and markets also plays a crucial role in determining value.

Investors require specific knowledge about the natural resources and their management to make informed investment decisions. For timberland, forest investment expertise is crucial, often managed by Timberland Investment Management Organizations (TIMOs).

Investments in these natural resources often align with ESG objectives, focusing on sustainability, water conservation, and carbon sequestration, which adds to their appeal for institutional investors.

Investments in farmland and timberland are subject to environmental risks like weather changes and climate impact, which can significantly affect the yield and quality of the resources.

Costs incurred from holding a physical commodity, including storage, insurance, and transportation. These costs must be outweighed by price appreciation for the investment to be profitable.

Governments often control natural resources and can influence commodity markets through subsidies, price supports, or direct control over extraction and production.

Environmental policies and climate objectives can significantly affect commodity investments, particularly in sectors like energy and agriculture.

Most commodity investments are made through derivatives such as futures and options, which provide liquidity and price discovery without the need to physically hold the commodity.

Market conditions determined by the relationship between current spot prices and future prices. Contango occurs when future prices are higher than spot prices, often due to high carry costs. Backwardation occurs when future prices are lower than spot prices, typically due to a high convenience yield.

CTAs use derivative contracts on commodities to devise trading strategies focused on predicting upcoming market trends, rather than advising on physical commodity transactions.

The forward price of a commodity can be expressed as the spot price plus costs of carry minus the benefits of ownership. This relationship helps in understanding how the forward and spot prices interact based on the costs and benefits involved.

Backwardation occurs when the forward price of a commodity is less than its spot price, often due to low inventories which increase the desirability of holding the physical commodity over derivative contracts.

Commodities are often considered as a hedge against inflation because their prices are directly included in inflation calculations and they tend to perform well when inflation is high.

Natural resources like farmland, timberland, and commodities can offer diversification benefits in an investment portfolio due to their low correlation with traditional asset classes like stocks and bonds.