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.
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.
Between 2009 and 2019 global production of crude oil increased 17 per cent1, with the largest regional increase in output coming from North America, which has seen supply grow 81 per cent1. In 2019 the three largest producers of oil were the United States, Saudi Arabia and Russia (see figure 1). Between 1988 and 2008 US supply decreased 30 per cent1, however this trend was more than reversed in 2009 as output from shale oil, also referred to as light tight oil, and other technological developments helped increase US production by 134 per cent1 between 2009 and 2019. US oil production, at 17,045 thousand barrel/day in 2019 is now much larger than Saudi Arabia’s 11,832 thousand barrel/day, thus making US the world’s largest oil producer by far. Saudi Arabia is a large swing producer – i.e. it does not produce at full capacity most of the time, but maintains spare capacity to respond to shocks.
1 BP Statistical Review of World Energy 2020
Figure 1: Global Crude Oil Supply, 2019
Source: BP Statistical Review of World Energy 2020
Over the last decade global oil consumption has increased 17 per cent1, with the largest regional increases occurring in the Asia (3.3% CAGR in the 2009-2019 period) and Africa (CAGR 2.1%). In 2019 the largest consuming countries were the United States (19.4 million barrel/day) and China (14 million barrel/day), see figure 2. Demand in China surged 71% per cent1 between 2009 and 2019, in contrast to the relatively small growth of 8% in US consumption, and declining consumption in Europe of -4%. Economic development in Asia can be expected to drive consumption amongst non-OPEC nations, with the largest absolute growth in demand emanating from China, India and South Korea, between now and 2040. Consumption amongst OPEC nations in the Middle East is also expected to grow, as it did (+2,2% CAGR) in the last decade ended 2019, on the back of growing populations, rising salaries, and increased industrial output.
1 BP Statistical Review of World Energy 2020
Figure 2: Global Crude Oil Demand, 2019
Source: BP Statistical Review of World Energy 2020
Oil is currently the most widely traded commodity in the world. Global trade has increased 31 per cent1 in the last decade ended 2019, with China’s net oil imports making up 58 per cent1 of the global increase in trade in 2018. The largest importers of oil in 2019 were Europe with 14.9 mln barrels/day, China with 11.8 mln barrels/day, the Usa with 9.1 mln/barrels/day, India with 5.4 mln barrels/day, and Japan with 3.8 mln barrels/day (see figure 3). US imports of oil have been in decline since 2008 (-2,3% CAGR in the 2009-2019 period), and this trend could continue with rising domestic production and decreasing demand due to increases in electric and hybrid vehicles and less fossil fuel-based economy. Japan is heavily dependent on trade, with imports making up 96.9 per cent of domestic consumption in 20191.
1 BP Statistical Review of World Energy 2020
Figure 3: Global Crude Oil Imports by Country, 2009-2019 (Thousand Barrels Daily)
Source: BP Statistical Review of World Energy 2020
Continued technological developments and increasing output in the US reduced its requirement for imports and made it become a more prominent player in the export market. Exports from Saudi Arabia, Russia, and US, currently the three largest exporters of crude (see figure 4), can also be expected to continue to service the rising demand for oil in Asia, namely China and India.
Figure 4: Global Crude Oil Exports by Region, 2009-2019 (Thousand Barrels Daily)
Source: BP Statistical Review of World Energy 2020
- Important Factors and Trends
- OPEC
- US as oil exporter
- WTI-Brent spread
- Inventories
OPEC is an intergovernmental organisation of 14 oil-exporting developing nations that coordinates and unifies petroleum policies attempting to efficiently manage production. At present, around 37 per cent of the world's oil supply and 50 per cent of global petroleum trade comes from OPEC member countries2. 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. In 2016, OPEC signed a Declaration of Cooperation (DoC) with 10 other nations, including Russia. OPEC coordinates production policy with these countries (jointly known as OPEC+). Together these countries control more than 50% of global production and so as a group of producers have a very strong influence on global oil prices.
2 US EIA, Energy & Financial Markets: What Drives Crude Oil Prices
Figure 5: OPEC Surplus Crude Oil Production Capacity (Million Barrels Per Day)
Source: EIA, Short-Term Energy Outlook, February 2020
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 64 per cent of global growth is coming from 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.
Up until 2010, the West Texas Intermediate (WTI) oil price generally traded at a premium to Brent oil price. WTI tends to be influenced by US domestic supply and demand, while Brent tends to be influenced by international supply and demand. They are both light, sweet crudes and thought of as close substitutes. Therefore, the price disparities should in theory be arbitraged out. However, in practice because of export restrictions, that arbitrage opportunity had not always existed. Between 2010 and 2014, a period when shale oil production in the US was rising rapidly, WTI began to trade at a wide discount to Brent, reflecting its relative oversupply. In 2014, the US government allowed the export of crude oil from the US which helped to narrow the price differential between the two oil benchmarks. However due to costs of transportation and limitations on export infrastructure, Brent still trades at a premium to WTI.
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
- Equities
- Futures
- Exchange Traded Products
One way for investors to gain exposure to oil is by investing in public listed companies involved in oil exploration, oil 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 Saudi Aramco, ExxonMobil, Royal Dutch Shell, Total and BP.
Figure 6: Gold
Source: Bloomberg
Figure 6: Oil
Source: Bloomberg
Figure 6: Aluminium
Source: Bloomberg
Figure 6: Coco
Source: Bloomberg
Figure 6: Wheat
Source: Bloomberg
There are two primary benchmarks for Crude - WTI and Brent. A variety of contracts are traded on several 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 in order to avoid taking actual delivery of the commodity in question or to avoid the cash settlement of the contract – this process is known as ‘rolling’. This ensures that continuous exposure to the commodity is maintained. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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. Sometimes 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 gain access and 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 years Brent Oil Futures and Dow Jones-UBS Brent and WTI Oil Subindices.
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 that is used in fertilizer production. Once considered a by-product of oil exploration, natural gas use has gained traction as an efficient and environmentally friendlier alternative to crude oil (although its use does contribute to green-house gas emissions).
In the last decade (2009-2019) the world production of natural gas has increased 36 per cent1. The two largest producers of natural gas are the United States and Russia who combined made up 40 per cent of total world production in 2019 Regionally, much of the increase in supply can be attributed to growing output in the Middle East where production has increased 68% per cent since 2009. In contrast, production in a number of European producing nations has decreased over the last decade (Cagr -2.5% in the period 2009-2019) and production in Russia has increased moderately (Cagr +2.4% in the period 2009-2019). In the United States, in turn, production increased with a Cagr of +5.14 per cent in the period 2009/19) on the back of increased output from shale gas. This is a key factor behind the sharp drop in US and global natural gas prices.
1 Source: BP Statistical Review of World Energy 2020
Figure 1: Global Natural Gas Supply by Region, 2019 (Billion Cubic Feet per day)
Source: BP Statistical Review of World Energy 2020
Natural gas was the world’s fastest-growing fossil fuel in terms of demand in the last decade, and according to McKinsey will be the strongest-growing fossil fuel and will increase by 0.9 percent from 2020 to 2035. It is the only fossil fuel expected to grow beyond 2030, peaking in 2037. From 2035 to 2050, gas demand should decline by 0.4 percent2. The largest consumers of natural gas are the US and Russia, which combined made up 38 per cent of total world demand in 2019. Although China makes up a relatively small portion of global consumption (about 7.8% in 2019), over the last decade demand has increased 240 per cent 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. When looking at sources of demand in USA, we find 36% for power generation, 33% industrial purposes, 16% for residential use (mainly heating and cooking) and 11% commercial (mainly heating and cooking)
2 https://www.mckinsey.com/industries/oil-and-gas/our-insights/global-gas-outlook-to-2050#
Figure 2: Global Natural Gas Demand by Region, 2019 (Billion Cubic Feet per day)
Source: BP Statistical Review of World Energy 2019.
Trade of natural gas has gone through something of a transformation with the introduction of new production processes, including shale gas exploration and LNG. Between 2009 and 2019 LNG trade increased 94%. In 2019 the Asia Pacific region was the largest source of imports with Japan accounting for 21.7 per cent of total world imports following the Fukushima nuclear disaster, which provoked a movement away from nuclear energy. Although LNG (liquified natural gas) trade is increasing, natural gas flow through pipelines still makes up 50.7% 62% of global natural gas trade. Rising domestic production in the United States has reduced the need for imports and from 2017 the US became a net exporter of natural gas, mostly thanks to increased pipeline exports to Mexico. US in 2019 was the 3rd largest LNG exporter of natural gas (9.8% of global mkt share), after Qatar (22.1%) and Australia (21.6%).
- Important Factors and Trends
- Seasonal commodity
- US Gas Market
- LNG & Shale Gas
- Link to Oil
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 2015 approximately 58 per cent of homes in the US were heated with natural gas3, 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.
3 https://www.eia.gov/
Figure 3: Natural Gas Futures Curve (USD/MMBtu)
Source: WisdomTree and Bloomberg
Due to infrastructure limitations, the world gas market has traditionally been fragmented with 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 ten 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 is occurring, as international LNG trade increases.
LNG production has become more cost-efficient and accounted for 49.3 per cent of the global gas trade in 2019. Qatar is currently and has historically been the largest LNG exporter. Australia and the US have grown dramatically in this market. In 2009 Australia had just over 10% global market share. By 2019 it has just over 20% market share and is less than 1% behind Qatar. The US was producing virtually no LNG in 2009. By 2019 it had close to 10% global market share. Domestic shale gas production in US has crowded out almost all LNG imports into US.
Shale gas, which is found trapped within shale formations and released through fracking, now comprises 78 per cent of US total natural gas production, offsetting declines in other US gas supplies and almost zeroing import requirements3. The net impact of this has been a significant increase in resource availability, which has contributed to lower natural gas prices.
3 www.eia.gov.com
Traditionally, gas contracts, particularly in Europe and Asia, were contractual arrangements linked to the price of oil, however over the past decade 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.
Investors can gain indirect exposure to natural gas by purchasing shares in publicly 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 and Chevron (United States), Royal Dutch Shell (Netherlands/UK), BP (UK), Total (France) 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 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. Hence, 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 iPath-Dow Jones, Bloomberg Natural Gas Subindex; S&P GSCI Natural Gas Index; UBS Bloomberg CMCI Components USD TR Natural Gas Index; Teucrium Natural Gas Fund Benchmark Index (United States).
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
- Supply
- Demand
- Above ground stocks
China is the largest producer of gold with 383 tonnes of mine production in 2019. China had been seeing tremendous growth in its mine output until 2016. However, production since 2016 has been on the decline. This is in part due to more stringent enforcement of environmental regulation. Russia overtook Australia as the second largest producer in 2019. Several new mines that came online in 2018 reached full production rates in 2019 in Russia.
Figure 1: Global Gold Production, 2019
Source: Metals Focus
Jewellery consumption is the largest source of physical demand followed by physical investment (excluding exchange traded products). Jewellery consumption, being a price sensitive market saw a decline in demand in 2019 and 2020 when gold prices were rising. In contrast in 2013 and 2014 when there was a sharp decline in gold price, jewellery demand rose substantially, especially in China and India - two countries with a strong cultural affinity to the metal.
Figure 2: Gold demand, 2020
Sources: Metals Focus
One of the unique features of gold is that its above ground stock is high relative to annual mine supply and estimated below ground reserves. Gold can relatively quickly move from jewellery to bullion to coin. Gold is not “consumed” in the same way as many other metals (e.g. most metals are put into an industrial application, which effectively takes it off-market). For this reason some people like to think of the metal as a monetary asset. However, in contrast to the fiat currencies issued by central banks, gold’s supply can’t be increased easily. That is one of the reasons investors turn to gold when central banks are increasing money supply.
Figure 3: Above ground stocks of gold and underground reserves, 2020
Source: World Gold Council
- Important Factors and Trends
- Inflation and Monetary Policy
- Exchange Traded Products
- Central Banks
- Portfolio Diversification
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 4: Gold Price vs. U.S. Inflation
Sources: 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.
Between 1989 and 2009, central banks were net sellers of gold. Over the past decade they have been net buyers. Its mainly emerging market central banks that have been buying bullion. In 2018 central bank buying of bullion peaked at 656.2 tonnes. 2019 buying was close at 648.2 tonnes, but in 2020 buying more than halved at 273.0 tonnes. Th slowdown in central bank bullion buying was led by Russia. After years of aggressive buying, Russia’s central bank (2299 tonnes) now has similar gold holds as France (2436 tonnes) and Italy’s (2452 tonnes) central banks.
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.
For more information on gold and its investment characteristics please see
- Investing
- Coins and Bars
- Mining Equities
- Accounts
- Futures
- Gold ETPs
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.
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’. 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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Gold markets are usually in contango, reflecting the cost of storing and insuring gold. Markets in contango present a drag on performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020.
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). For more information on physically-backed gold exchange traded products, please see Due Diligence: Choosing A Physical Gold ETP. 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).
For more information on investing in gold using ETPs, visit our gold ETPs section.
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.
The dominant producer of platinum is South Africa, accounting for over 70 per cent of global supply in between 2015 and 2020. 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 20% in 2020 driven by a 27% decline in South African production, following the pandemic-related social distancing at mines and the disruption to Anglo American Platinum’s (Amplats’) Anglo Converter Plant (ACP).
The production of palladium is concentrated mainly in two countries – Russia and South Africa, which accounted for 41 per cent and 31 per cent of global supply in 2020 respectively. Prior to 2015 South Africa was a larger producer than Russia, but the latter has overtaken since 2016. Palladium has been in a supply deficit every year since 2015. That tightness in supply has contributed to price of palladium rising more than four-fold between 2015 and 2020.
Figure 1: Platinum, Mine Supply 2020 (Tonnes)
Sources: Johnson Matthey, WisdomTree
Figure 2: Palladium, Mine Supply 2020 (Tonnes)
Sources: Johnson Matthey, WisdomTree
The largest source of demand for both platinum and palladium is the automotive sector. An autocatalyst is a device installed in internal combustion engine cars that converts harmful pollutants into safer gases. Platinum group metals (PGM) including platinum, palladium and rhodium are key ingredients in the autocatalyst that generate this chemical conversion. Autocatalysts were first introduced in the mid-1970s and today are used in almost all internal combustion engine vehicles (including hybrid vehicles). In 2019, automobiles accounted for 32% of platinum demand and 86% pf palladium demand.
Today, there are higher loadings of palladium in gasoline autocatalysts and higher loadings of platinum in diesel autocatalysts. However, both autocatalysts carry some loadings of each metal. Europe is the largest diesel passenger car market in the world. In most of the rest of the world, gasoline cars dominate.
The Jewellery market accounted for 23% of platinum demand in 2020. It has been steadily declining from a market of 85.5 thousand tonnes in 2015 to 49.3 thousand tonnes in 2020. The jewellery market for palladium is very small in comparison, accounting for less than a percent of demand.
Platinum investment demand has ranged between 1% and 13% of all demand in between 2015 and 2020. Palladium investment demand in contrast has been falling every year since 2015, and has actually been a source of supply into this tight market.
Figure 3: Global Platinum Use, 2020 (Tonnes)
Source: Johnson Matthey
Figure 4: Global Palladium Use, 2020 (Tonnes)
Source: Johnson Matthey
- Important Factors and Trends
- Concentration of Supply
- Automotive Industry
- Recycling
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.
The automotive sector is a key source of demand for platinum and palladium with motor vehicles using both metals in autocatalysts. Today, there are higher loadings of palladium in gasoline autocatalysts and higher loadings of platinum in diesel autocatalysts. However, both autocatalysts carry some loadings of each metal. Europe is the largest diesel passenger car market in the world. In most of the rest of the world, gasoline cars dominate. However even in Europe diesel cars have fallen out of favour following ‘Dieselgate’1 and tightening particulate emissions standards across Europe, where diesel cars do not perform as well as their gasoline equivalents2. As this switch in demand occurred, palladium prices rose more than four-fold between 2015 and 2020, while platinum prices fell have basically been flat between 2015 and 2020 (they fell between 2015 and 2018, but made up those losses by 2020).
With rising emission standards in the commercial vehicle market, platinum is starting to see demand stabilise (as these vehicles are more diesel-heavy).
The growth of the hydrogen economy could also act a new source of demand for platinum. Fuel cell vehicles also use platinum (not palladium or rhodium) as the main catalyst in the reactions to produce electricity and water from hydrogen fuel and water. In addition platinum is used in the electrolysers that produce hydrogen.
1 The Volkswagen emissions scandal (also know as Dieselgate) began in September 2015, when the United States Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to German automaker Volkswagen Group. The agency had found that Volkswagen had intentionally programmed turbocharged direct injection (TDI) diesel engines to activate their emissions controls only during laboratory emissions testing which caused the vehicles' NOx output to meet US standards during regulatory testing, but emit up to 40 times more NOx in real-world driving.
2 While diesel cars have lower carbon emissions than gasoline cars, they tend to have higher NOx emissions. Carbon emissions are more easily dealt with by the autocatalyst whereas NOx emissions require additional devices.
Recycling is a meaningful source of supply in the platinum group metals market, with cars that come to end-of-life being a large source of supply. Approximately a quarter of platinum and a third of palladium total supply comes from recycled sources.
Figure 5: Platinum, Recycling as a Source of Supply
Sources: Johnson Matthey, February 2021
Figure 6: Palladium, Recycling as a Source of Supply
Sources: Johnson Matthey, February 2021
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 publicly 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 45 per cent of platinum production market share. The largest palladium company is MMC Norilsk Nickel, with a 41 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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Platinum markets are usually in contango, reflecting the cost of storing and insuring the metal. Palladium has frequently been in backwardation over the past five years, reflecting the acute supply tightness in the market. Markets in contango present a drag on performance, while markets in backwardation enhance performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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 Bloomberg Platinum Subindex; Bloomberg CMCI Platinum Index; S&P GSCI Platinum Index.
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 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 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. Photovoltaics and electric vehicles may become the biggest drivers of demand growth for silver in the coming years.
Between 2010 and 2019, supply of silver remained largely steady. Supply fell, however, in 2020 on account of the coronavirus pandemic which caused a reduction in mine production. In 2020, mine production accounted for around 80 of total supply while scrap accounted for around 19%. As shown in the figure below, Mexico is the largest producer of silver worldwide accounting for 23% of total supply in 2019. In second place was Peru with 16% and in third place China with 13%.
Figure 1: Global Silver Supply 2019
Source: World Bureau of Metal Statistics, Metals Focus
As shown in the figure below, more than half of total silver demand is driven by industrial applications. Silver’s industrial applications are diverse. According to the Silver Institute, silver is used in solar technology, electronics, photography, medical applications, water purification, and automobiles. Jewellery and silverware account for around 20% of total silver demand.
Focusing on renewable sources of energy, silver is a key component of photovoltaics (solar panels). Around 10% (96 million ounces) of all silver uses in 2020 was in photovoltaics and its use in this category has doubled since 2014. There is more silver been used in photovoltaics than in the silverware and photography categories combined. Given the commitments to net zero emissions by 2050 from European Union, United States, Japan, South Korea, and similar commitments by China by 2060, we expect the use of photovoltaics to expand. Despite the trend of thrifting – applying less quantity of silver per solar application - we expect the volume of solar installations to expand aggressively over the coming decades given the renewable aspirations.
Silver’s use in electric vehicles also presents another exciting avenue of growth. Silver’s use in battery operated electric vehicles ranges between 25-50 grams (g) per vehicle compared to 25-28g for internal combustion engine vehicles. Silver’s automotive demand may rise to 88 million ounces (Moz) by 2025 compared to 51Moz in 2020 as electric vehicles proliferate on the roads.
Figure 2: Global Silver Use, 2020.
Source: Metals Focus
- Important Factors and Trends
- Gold:Silver Ratio
- Industrial Demand
- Investment
- Volatility
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, 2010-2021
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 50 per cent of total downstream demand as illustrated in Figure 2, 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.
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 Fresnillo (Mexico), GlencoreXstrata PLC (Switzerland); KGHM Polska Miedz SA (Poland); and Pan American Silver Corp (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. A commodity is said to be in contango when the price of a distant futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant futures contract is lower than the price of a nearer future. Silver markets are usually in contango, reflecting the cost of storing and insuring silver. Markets in contango present a drag on performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020.
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 Bloomberg Silver Subindex and S&P GSCI Silver Index.
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. Aluminium possesses a wide range of properties which make it beneficial to the economy. It is malleable, ductile, easily machined and cast, and has excellent corrosion resistance and durability.
There are two methods for producing aluminium. Primary production, which involves the mining of aluminium ore (more commonly known as bauxite). Bauxite, which is found mainly in the topsoil of various tropical regions, 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 also highly recyclable, with most of the aluminium ever produced still in use. Furthermore, recycled aluminium requires substantially less energy to produce compared with primary production.
Between 2012 and 2020 primary aluminium production increased by 32.8 percent, with much of this growth driven by increased output in China. From 2012 to 2020, China’s primary aluminium production increased by approximately 59 percent. Global primary aluminium production was approximately 65 million metric tonnes in 2020, with China accounting for 57 percent of this production. In contrast, from 2012 to 2020, North America and South America saw a decline in primary production of 18 and 51 percent, respectively
Figure 1: Global Primary Production by Region (International Aluminium Institute)
China is both the leading supplier and consumer of primary aluminium, accounting for approximately 56 percent of global demand for primary aluminium in 2019. Europe and North America accounted for the majority of the demand outside Asia at 13.8 and 10 percent respectively.
Figure 2: Global Primary Demand by Region (Wood Mackenzie)
- Important Factors and Trends
- Construction
- Cost of Production
- CO2 Emissions
- Recycling
- Inventories
Due to most of the aluminium demand coming from China, the global end-use of aluminium can be proxied through China’s end-use statistics. In China, construction accounts for approximately 33 per cent of global downstream aluminium consumption. Factors driving the use of aluminium in this industry include its high strength-to-weight ratio, forming methods that aid design flexibility and its recyclability (Aluminium Federation, Aluminium in Building and Construction). China is continuing to shift away from wood to aluminium for concrete casting as part of an effort to help minimize construction waste. 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). 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 3: China Aluminium End-Use by Region (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 1972 (International Aluminium Institute, The Global Aluminium Industry) to 6 per cent in 2020. China’s market share rose to over 50 per cent in 2020. 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 several smelters operating on a loss-making basis. Continued increases in energy prices may lead to rising production costs which could reduce the China oversupply.
Unlike most other major producers of aluminium, China is heavily dependent on coal for production. In 2019, approximately 90 percent of China’s power output for aluminium production was derived from coal (International Aluminium Institute). High carbon emissions and international pressure have led China to pledge to be carbon neutral by 2060. New constraints on the coal-dominant smelting process will inevitably result in reduced aluminium supply from China. Furthermore, this reduction in supply will likely coincide with a period of rising demand due to the increased use of aluminium in fuel-efficient vehicles. Instances of short-term supply tightening have already been observed in other regions, with Inner Mongolia recently enforcing smelting curtailments to meet Q1 2021 energy consumption targets.
Whilst the production of aluminium is relatively energy intensive, the recycling of aluminium requires as little as 8 per cent of the energy and emits only 8 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 scrap (International Aluminium Institute, Global Aluminium Recycling: A Cornerstone of Sustainable Development). Furthermore, 75 percent of all aluminium ever produced is still in use (Bloomberg). 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 2012. Since this period, LME inventories have steadily decreased to approximately 1.35 million tonnes at the end of 2020, signalling a rebound in demand outside of China.
- Investing
- Equities
- Futures
- Exchange Traded Products
Investors can gain indirect exposure to the price of aluminium by investing in publicly listed companies involved in the primary aluminium production lifecycle. Well-known aluminium producing companies include Aluminium Corporation of China Ltd (China), China Hongqiao Group (China), Rio Tinto PLC (UK), United Company RUSAL (Russia) and Alcoa Inc. (United States).
Aluminium futures are traded on exchanges in London, New York and Tokyo. The most widely traded aluminium futures contract is the London Metal Exchange (LME) Aluminium contract (‘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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Aluminium markets are often in contango, reflecting the cost of storing aluminium. But when there are signs of supply tightness like in 2021, the futures curve can be in backwardation. Markets in contango present a drag on performance, while backwardation enhances performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
Most Aluminium ETPs are synthetic products that 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 of front-month futures price (as provided below).
Examples of indices providing aluminium futures exposure include Bloomberg Aluminium Subindex; S&P GSCI Aluminium Index; UBS Bloomberg CMCI Aluminium Index;
Copper
Copper is a metal with a wide variety of chemical and physical properties that make it vital to society. It is malleable, ductile, and resistant to corrosion. Copper also 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.
Copper production broadly is a three-step process – ore processing, smelting and refining. Copper is predominantly mined by open pit method with the remainder mined underground. The copper concentration of the unprocessed ore usually ranges between 1-2%. In the ore processing step, the mined ore is crushed, and the copper is separated out from the mix through a process called flotation. The process of smelting ensures further removal of impurities from the concentrate. The final production stage is electro-refining, which results in the final product – refined copper.
The process of refining raw copper ore is referred to as “primary copper production”. Another important source of copper is scrap metal. The extraction of copper from scrap metal is referred to as “secondary copper production”. The refining process for secondary copper production is similar to that of primary copper production.
All copper traded on the London Metal Exchange is refined.
Between 2012 and 2020 global mined production increased 12 percent, with much of this growth driven by increased output in Asia, Africa, and South America. Production increased 19, 12, and 7 percent respectively during this eight-year period. In contrast, growth has been marginal in North America and Europe, which both saw production increase only 3 and 5 percent respectively since 2012. In 2020, South America and Asia accounted for nearly 60% of global mined production.
Figure 1: Global Mined Supply by Region (Bloomberg)
Global refined copper production is greater than mined production and has increased 9 percent between 2012 and 2020. This growth has been driven by rising refined output in Asia. China has increased its output by 59 percent in the last eight years and is the dominant supplier of refined copper in Asia, representing over 40 percent of the global supply of refined copper.
Figure 2: Global Refined Supply by Region (Bloomberg)
Demand for refined copper increased 13 percent between 2012 and 2020. Over this period consumption in Asia increased by 30 percent. This contrasts with falling demand in Europe where consumption decreased by roughly 19 percent. In 2020, China demand represented approximately 58 percent of total world consumption of refined copper.
Figure 3: Global Refined Demand by Region (Bloomberg)
- Important Factors and Trends
- Cyclical Commodity
- Supply Constraints
- Emerging Technologies
- Inventories
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 4: Global Refined Copper End-Use by Region (Bloomberg)
The copper mining industry faces several 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. 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. Grasberg, one of the largest copper mines in the world, has been depleted of nearly all its high-grade open pit ore, forcing Freeport to transition to mainly underground mining operations. 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. More recently, work stoppages to mitigate the spread of Covid-19 have delayed supply.
Copper is being increasingly used in a wide variety of emerging technologies. Demand for copper has significantly increased due to increased focus on electric vehicles and clean energy production. Due to its antimicrobial properties, copper is finding increased use in medical applications as an alternative to plastic. The increasing demand coupled with tightened supply has contributed to a refined copper deficit of nearly one million metric tonnes in 2020.
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
- Equities
- Futures
- Exchange Traded Products
Investors can gain indirect exposure to copper by investing in publicly listed companies involved in the global mined copper production lifecycle. The largest companies include Codelco; Freeport-McMoRan Copper & Gold; BHP Billiton Ltd.; and Glencore.
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). Copper futures can also be traded on the Chicago Mercantile Exchange (CME). Both LME and CME copper contracts are physically settled. Copper traded on the LME may be delivered to any of the 34 locations around the globe. Copper traded on the CME may only be delivered to US locations, which makes its price more US-specific. The imposing of trade duties can also drive the price differential between the two contracts.
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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Copper markets are often in contango, reflecting the cost of storing copper. But when there are signs of supply tightness like in 2021, the futures curve can be in backwardation. Markets in contango present a drag on performance, while backwardation enhances performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020.
Most Copper ETPs are synthetic products that 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 Bloomberg Copper Subindex; S&P GSCI Copper Index; UBS Bloomberg CMCI Copper Index; SummerHaven Copper Index (United States)
Nickel
Nickel is a lustrous, silvery-white metal that is widely recognized due its use in coins by several countries. However, nickel possesses a variety of physical and chemical characteristics that make it an invaluable component to a variety of applications across society. Nickel has a high resistance to corrosion and oxidation, as well as excellent strength at high temperatures. Furthermore, nickel alloys with many other metals.
Nickel is primarily used as an alloying metal in the production of stainless steel, which has many uses in industrial, construction, and household products. Increased emphasis on renewable and clean energy are likely to contribute to nickel demand in the future. Within the clean/renewable energy space, nickel is used in a variety of applications, including wind-turbines, solar cells, and carbon storage1. Demand for high-grade nickel is also expected to rise in the future due to its importance in batteries for electric cars.
Refined nickel produced from raw nickel ore is referred to as primary nickel. The production of primary nickel from raw ore is a multi-step process. The two main sources of primary nickel are nickel sulphate and laterite ores1. Typically, the nickel ore is mined and subsequently crushed, with the nickel being separated from waste materials through a process called flotation. In the flotation process, the crushed ore is mixed with various reagents, and the nickel concentrate is collected. The extracted concentrate is then smelted using temperatures of around 1350°C to produce a nickel-iron sulphide matte containing approximately 25-45 percent nickel. The sulphur is removed from the matte through a leaching process. Finally, the remaining nickel is further refined through a process called electrorefining.
Nickel is also readily recycled in many of its applications, with large amounts of secondary, or “scrap”, nickel being used to supplement the primary nickel.
All nickel traded on the London Metal Exchange is refined.
1 WisdomTree Nickle Infographic
Global mined production increased 7 percent between 2012 and 2020, with much of this growth driven by increased output in Asia and Europe. Production increased 11 and 10 percent respectively during this eight-year period. Indonesia, the largest producer of primary nickel in Asia, was the main driver of this growth with a 19 percent increase in production since 2012. Indonesia, Philippines, and China account for approximately 47 percent of global mined production in 2020. Output from Oceanic countries also increased 8 percent from 2012 to 2020. Australia and New Caledonia account for nearly all mined supply in Oceania, at approximately 8.8 and 8.5 percent of global output, respectively. North America has seen a production decrease by 9% since 2012, primarily due to decreasing output from Canada.
Figure 1: Global Mined Supply by Region (Bloomberg)
Global refined nickel production has increased 46 percent between 2012 and 2020. This growth is primarily attributable to the rising refined output in Asia. China, currently accounting for over 29 percent of global refined production, has seen a 39 percent increase in refined production from 2012 to 2020. Furthermore, Chinese stainless-steel producers have been seeking to reduce costs by using nickel pig iron, a low-grade ferro nickel, instead of high-purity refined nickel. Indonesia has been a major exporter of nickel pig iron to China, and consequently has seen a substantial increase in refined production since 2012. Indonesia currently accounts for nearly 24 percent of global refined production. Russia, Canada, and Australia represent other significant sources of refined nickel production outside Asia.
Figure 2: Global Refined Supply by Region (Bloomberg)
Demand for refined nickel increased 48 percent between 2012 and 2020. Asian countries were the primary driver of this increased demand, partially due to increased demands for refined nickel in electric vehicle batteries. In 2020, China accounted for over 56 percent of global demand. In 2020, primary nickel was in a supply surplus of approximately 100000 tons. However, high-grade nickel, which is the underlying for the LME nickel futures contract is utilized in lithium-ion batteries, continues to be in tight supply due to the increasing demand in the electric vehicle market.
Figure 3: Global Refined Demand by Region (Bloomberg)
- Important Factors and Trends
- Electric Vehicles
- Economic Conditions
- Government Policies
- Inventories
Electric vehicles (EVs) will play a critical role in achieving greenhouse gas emission targets set by policymakers. Lithium-ion batteries are currently the dominant technology for EV batteries. These batteries utilize nickel in several key cathodes, namely lithium nickel manganese cobalt (NMC) and lithium nickel cobalt aluminium oxide (NCA). The use of NMC as cathodes is expected to account for more than half of cathode solutions by 2025, and close to 90 percent by 20302. Batteries currently constitute approximately 5 percent of nickel demand, but this figure is expected to rise to 30 percent by 2040.
Figure 4: EV Market is expected to demand more nickel to support its growth
Furthermore, the percentage of cars being sold being EVs is expected to rise from 8 percent in 2020 to 60 percent in 2040.
Figure 5: Global Passenger Car Sales Forecast
2 Nickel’s role in electrifying cars
Approximately 63 percent of global refined nickel is used as an alloying metal in stainless steel production, with downstream applications including construction, industrial, and household products. Consequently, nickel demand is heavily influenced by global economic conditions. This cyclic tendency has been most recently evidenced in the recent Covid-19 pandemic. In March 2020, LME nickel futures fell to 11109 USD per metric ton amidst a bleak economic outlook, then proceeded to rebound to 17024 USD per metric ton in December 2020 as the global economy recovered. Recently there have been concerns about the ability to produce enough battery-grade nickel.
Figure 6: Global Refined Nickel End-Use by Region (Bloomberg)
There have been several instances of government policies impacting nickel prices. Indonesia, a leading exporter of primary nickel, imposed bans on laterite ore (a major source of nickel) exports in early 2020 to support its domestic smelting industry. The Philippines, a major exporter of primary nickel, has previously imposed restrictions on open-pit mining due to environmental concerns. However, in early 2021 these bans were lifted to improve the country’s economy following the Covid-19 pandemic. Tariffs imposed by large consumers of nickel can also significantly impact the price of nickel.
Inventories are a useful indicator of the supply and demand dynamics operating in the nickel industry. Changes in inventory levels tend to mirror shifts in market conditions with any significant changes usually contributing to moves in the price of nickel. China represents most of the global refined nickel demand, and thus plays a large role in the price of nickel. The main Shanghai warehouses are considered to be the best indicators of domestic Chinese stock levels.
- Investing
- Equities
- Futures
- Exchange-Trade Products
Investors can gain indirect exposure to nickel by investing in publicly listed companies involved in the global mined nickel production lifecycle. The largest companies include Vale; Norilsk Nickel; Jinchuan Group.; and Glencore.
Nickel futures can be traded in London on the London Metal Exchange (LME) as well as the Shanghai Futures Exchange. For the LME futures, the contract code is ‘LN’, and the underlying metal must be a minimum of 99.8 percent purity. 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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Nickel markets are often in contango, reflecting the cost of storing nickel. But when there are signs of supply tightness like in 2021, the futures curve can be in backwardation. Markets in contango present a drag on performance, while backwardation enhances performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
Most Nickel ETPs are synthetic products that track indices that are constructed to simulate a continuous exposure to nickel 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 nickel 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 nickel 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 nickel futures exposure include the Bloomberg Nickel Subindex; S&P GSCI Nickel Index; UBS Bloomberg CMCI Nickel Index.
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.
The production of cocoa is heavily concentrated in the African continent which made up 76 per cent1 of the market share in cocoa beans in 2018/19. Between 2011 and 2020 world output increased 15 per cent2, however supply can be volatile as output is particularly sensitive to a variety of environmental conditions. Between 2011 and 2020 annual growth rates have ranged from minus 6 per cent to 19 per cent2.The Cote d’Ivoire and Ghana were the two largest producers of cocoa beans in 2018-19 (see figure 1).
1 International Cocoa Organisation
2 International Cocoa Organization, World Cocoa Bean Production, Grindings, and stocks
Figure 1: Global Cocoa Bean Supply by Country, 2018-19
Source: ICCO Quarterly Bulletin of Cocoa Statistics, Vol. XLVII, No. 1, Cocoa year 2020/21
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 2011 and 2020 demand increased steadily by 17.5 per cent2, its growth far less volatile than that of supply. The fall in consumption over the last ten years occurred between 2014/15. The largest processors of cocoa in 2018/19 were the Netherlands, Cote d’Ivoire and Indonesia (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 2018/19 the largest consumers3 of cocoa were the United States (797,000), Germany (347,000), France (228,000) and United Kingdom (221,000) tons.
2 International Cocoa Organization, World Cocoa Bean Production, Grindings, and stocks
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)
Figure 2: Global Cocoa Bean Grinding by Country, 2018-19
Source: ICCO Quarterly Bulletin of Cocoa Statistics, Vol. XLVII, No. 1, Cocoa year 2020/21
In 2019, the top exporters of Cocoa Beans were Cote d’Ivoire, Ghana, Nigeria, Ecuador and Cameroon. While top importers of Cocoa Beans were Netherlands, Germany, Malaysia, United States and Belgium.
Figure 3: Global Net Importers of Cocoa Beans, 2019 (US $ Billion)
Source: The Observatory of Economic Complexity
Figure 4: Global Net Exporters of Cocoa Beans, 2019 (US $ Billion)
Source: The Observatory of Economic Complexity
- Important Factors and Trends
- Weather
- Political
- Diseases
- Market Concentration
- Living Income Differential
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.
Cocoa crops are clipped by 2.4% on average worldwide during El Nino, 2% in the Ivory Coast (40% of global supply) and 6% in Ecuador (the most-affected region), according to an ICCO study covering 1949-2008. Cocoa prices rise 1.66% on average as a result. The study found a weaker link between La Nina and global production. El Nino patterns are irregular in duration and frequency, with the last significant spike in 2015-16 causing a 174,000 metric-ton deficit. The La Nina) in 2021 (which usually brings mild weather and weaker Harmattan dry winds has initial indications of being yield positive and subsequently price negative.
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.
4 International Cocoa Organization, ‘Impact of El Niño / La Niña Weather Events on the World Cocoa Economy’
5 World Cocoa Foundation, Challenges
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.
6 International Cocoa Organization, Pests and Diseases
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. Barry Callebaut's emerging-market volume recovered in late 2020, ahead of Europe, with Asia more vulnerable than the Americas due to a larger exposure to out-of-home channels. Emerging countries make up 36% of volume vs. 26% in 2013, slightly less than at Nestle and Mondelez. Just 7% of Lindt's revenue is from these markets, but that's increasing via distribution deals and direct-to-consumer expansion.
Ivory Coast and Ghana stepped up efforts to reform the cocoa industry by imposing a fixed “living income differential” of US$400 per tonne on all cocoa contracts sold by either country for the 2020/21 season. This premium replaces an earlier proposal for a floor price for cocoa contracts, which is part of a wider plan to combat poverty among farmers in Ivory Coast and Ghana, which together account for more than 60% of global supply. Funds raised by the living income differential (LID) will be used to help increase payments to farmers, with the aim being for them to get 70% of a $2,600 a tonne Free-on-Board (FOB) target price, the letter sent by the two governments to a trade federation says. Cote d’Ivoire and Ghana.
- Investing
- Equities
- Futures
- Exchange Traded Products
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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Cocoa markets are usually in contango, reflecting the cost of storing. Markets in contango present a drag on performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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 Bloomberg Cocoa Subindex Total Return Index; UBS Bloomberg CMCI Components USD Total Return Cocoa Index; S&P GSCI Cocoa Index Spot CME
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.
Between 2009/10 and 2019/20 the annual increase in production of Arabica coffee ranged between minus 43 per cent and 18 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 percent2. Brazil is the largest producer of coffee by some distance, accounting for 44 per cent1 of world Arabica production in 2019/20 (see figure 1).
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
Figure 1: Global Arabica Supply, 2019/20
Source: USDA, Foreign Agricultural Service
Global consumption of coffee2 over the last decade has increased 27 per cent1, with a significant proportion of this growth attributable to rising demand in both developed and developing nations. Since 2016, levels of demand in EU have risen by 7%, the United States by 2%, Indonesia by 53% and Vietnam by 12%. In contrast, over the same period of time, consumption in Philippines has decreased 13 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.
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
Figure 2: Global Total Coffee Demand, 2019/20
Source: USDA, Foreign Agricultural Service
Between 2009/10 and 2019/20 global world imports increased 33 percent1. The largest net importers of coffee are the EU and the United States which account for 45 per cent and 21 per cent1 of world imports respectively (see figure 3). Brazil accounts for 29 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, 2016-2021(Thousand 60-Kilogram Bags)
Source: USDA, Foreign Agricultural Service
Global world exports have increased 38 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 57 per cent, Colombia by 66 per cent and India by 47 per cent1 over the last decade. (see figure 4).
1 USDA, Foreign Agricultural Service, Coffee: World markets and Trade, June 2013
Figure 4: Top Exporters of Coffee, 2016-2021 (Thousand 60-Kilogram Bags)
Source: USDA, Foreign Agricultural Service
- Important Factors and Trends
- Brazil
- Disease
- Developing Markets
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.
3 International Coffee Organization
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
- Equities
- Futures
- Exchange Traded Products
Investors may gain indirect exposure to the coffee market by investing in publicly 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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Coffee markets are usually in contango, reflecting the cost of storing. Markets in contango present a drag on performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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 Bloomberg Coffee Index; UBS Bloomberg CMCI Coffee Index; Barclays Coffee 3 Month Deferred Index (United States).
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.
Over the last decade production of corn has grown 37.3 per cent1. World supply is currently projected to grow 13.12 per cent between 2021/22 and 2030/31, with China and Brazil posting the largest gains and fastest growth among major producers. Through the baseline period, supply is expected to grow faster than use, raising the stocks-to-use ratio. The two largest producers in 2018/19 were the United States (US) and China, which combined made up 55 per cent3 of total world supply of corn (see figure 1). The baseline projects U.S. corn production to grow over the next decade as yield gains offset a gradual decline in acreage. The United States Department of Agriculture’s (USDA) 2020/21 U.S. corn outlook is for greater feed and residual use, increased corn used for ethanol production, larger exports, and lower ending stocks. Expanding meat production is expected to boost feed and residual use over the baseline period. Over the next decade, US supply is currently forecast to increase by 20 per cent2. Despite a large corn harvest, China’s corn prices rose to near-record levels in 2020. Its corn imports also surged as a large stockpile of corn was depleted following five years of auction sales.
1 USDA, Foreign Agricultural Service
2 USDA, Economic Research Service, 2021 International Long-Term Projections to 2030
3 USDA, World Agricultural Supply and Demand Estimates
Figure 1: Global Corn Supply, 2018-2019
Source: USDA, World Agricultural Supply and Demand Estimates
Over the last decade global demand for corn has increased 35.8 per cent3, with consumption projected to increase by just over 12.3 per cent2 up to 2030/31 with feed use growing 16.4 percent and accounting for more than 80 percent of the total expansion. Developing countries and regions, including Mexico, India, Iran, and Southeast Asia are likely to show the strongest growth in feed demand. Growth in domestic corn demand is strongest for feed and residual use, driven by domestic meat production to meet both domestic and export demand for beef, pork, and poultry.
Corn is the primary feedstock for U.S. ethanol, accounting for more than 98 percent of ethanol production. Over the projection period, corn use for ethanol production is projected to remain relatively flat, increasing by 0.5 percent over the decade. Corn used to produce ethanol continues to be a substantial source of demand for the sector, accounting for about one-third of total U.S. corn use through the projection period. In 2018/19 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. The baseline projects corn use for ethanol to be relatively flat, but steady.
2 USDA, Economic Research Service, 2021 International Long-Term Projections to 2030
3 USDA, World Agricultural Supply and Demand Estimates
Figure 2: Global Corn Demand, 2018-19
Source: USDA, World Agricultural Supply and Demand Estimates
Corn imports expanded to an estimated 18.3 million tons in 2020/21 and are projected to reach 25.7 million tons in 2030/31, making Mexico the world’s largest corn importer by 2030/31. Through 2030, world corn trade is projected to increase 22.5 percent and corn trade is expected to account for about 82.9 percent of the world’s coarse grain trade by 2030/31. In 2019/20 the largest importers of corn included Japan, Mexico and the European Union with demand for meat driving imports amongst developed nations in the Asia region (see figure 3).
Figure 3: Share of Global Corn Imports 2019-2020
Source: USDA, Foreign Agricultural Service
Together the three regions – South Asia, Southeast Asia, and Oceania account for 17 percent of expected growth in world corn imports. Vietnam is among the fastest growing corn-importing countries in this region and Bangladesh is an emerging corn importer to supply its expanding poultry industry. Indonesia, however, has implemented policies to limit imports of both corn and feed wheat to support domestic corn production. Potential for further expansion of China’s corn output may be limited since the crop already occupies a quarter of the country’s planted area following a 70-percent expansion during the last decade. Amid high domestic corn prices, China has been active in purchasing competitively priced feed grains as substitutes for domestic corn. Already in 2020, China has used temporary reserves of wheat and rice and imports of feed quality wheat in substitution for high priced, domestic corn. This is illustrated in Figure 4, with record corn imports by China forecast at 24 million tons for 2020/21. China’s demand for feedstuff continues to rise as its swine herd recovers from the African swine fever. China’s Ministry of Agriculture and Rural Affairs (MARA) indicated in 2020 that China has had a corn supply gap for the last several years which has been met with auctions from reserves. Owing to tight reserves, substantial corn imports will be necessary to meet demand while also controlling further price increases and maintain stocks throughout 2021. Early Growth in corn imports is assumed to be constrained by China’s Tariff Rate Quota (TRQ).
Figure 4: Global Corn Imports, 2016-2021 (Million Tonnes)
Source: USDA, Foreign Agricultural Service
Despite the sharp rise in Chinese imports projected in 2020/21 by the Foreign Agricultural Service (see Figure 4), USDA’S long term projections to 2030 (see figure 5) do not reflect a continuation of the sharp rise in Chinese imports to 2030, casting doubts on its sustainability.
Figure 5: Corn trade long-term projections (Million metric Tonnes)
U.S. corn exports are expected to increase 11.4 million tons to 70.5 million tons by 2030/31, while the U.S. share of world corn exports declines from the recent 5-year average of 33.0 percent to about 30.5 percent. Brazil is the only major exporter with a projected increase in market share, from 21.9 percent in 2021/22 to 26.1 percent in 2030/31. The four largest exporting countries, the United States, Brazil, Ukraine, and Argentina account for about 89 percent of global market share over the projection period.
Figure 6: Share of Global Corn Exports 2019-2020
Source: USDA, Foreign Agricultural Service
Brazil’s annual corn exports have increased by 60 percent over the past decade and averaged 33.7 million tons in the past five years. Export growth continues to be associated with expanding production of second-crop corn following soybeans on new cropland in the Centre-West region. Corn production in this region requires less fertilizer use since it follows soybeans and is better positioned for exports than for domestic use by the poultry industry that is concentrated in the southern part of the country. (see figure 7)
Figure 7: Global Corn Exports, 2016-2021 (Million Tonnes)
Source: USDA, Foreign Agricultural Service
- Important Factors and Trends
- Biofuel Production
- Biotechnology and Policy
- Increasing Meat Consumption
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 2018-20193.
3 USDA, World Agricultural Supply and Demand Estimates
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
- Equities
- Futures
- Exchange Traded Products
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 information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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 Bloomberg Corn Subindex; UBS Bloomberg CMCI Components USD Price Index Corn; S&P GSCI Corn Index; Teucrium Corn Fund (United States).
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.
In the last decade world production of soybeans has increased 32 per cent1, with global output projected to increase 21.4 per cent2 between 2021/22 and 2030/31. Cumulatively the top three producers, United States, Brazil and Argentina, made up 81 per cent3 of total world production in 2019/20 (see figure 1). Over the next decade much of the increase in the global production is expected to be driven by output Brazil, the United States and Argentina2. Increased planted area drives about 57 per cent of projected production gains and yield growth about 43 per cent2.
1 UDSA, FAS, World: Soybeans and Products Supply and Distribution
2 USDA, Economic Research Service, 2020 USDA Agricultural Projections to 2030
3 USDA, World Agricultural Supply and Demand Estimates
Figure 1: Global Soybean Supply, 2019/20
Source: USDA, World Agricultural Supply and Demand Estimates
Global consumption of soybeans has increased by 52 per cent1 in the last decade, with demand projected to increase by 23.6 per cent2 between 2021/22 and 2030/31. The world’s largest consumers of soybeans are China, United States and Brazil which combined make up 63 per cent3 of world demand in 2019/20 (see figure 2). According to USDA, Brazil will take the biggest share of China’s future soybean demand, but US exports and prices also benefit from revived Chinese demand. Demand in the rest of the world is not expected to grow as fast as in China, but emerging economies continue to expand the use of soybeans as a feedstock as diets diversify to include more animal products2.
1 UDSA, FAS, World: Soybeans and Products Supply and Distribution
2 USDA, Economic Research Service, 2020 USDA Agricultural Projections to 2030
3 USDA, World Agricultural Supply and Demand Estimates
Figure 2: Global Soybean Demand, 2019/20
Source: USDA, World Agricultural Supply and Demand Estimates
World soybean trade is projected to increase 26.7 per cent (1.8 per cent annually) through 2030, marking one of the largest projected gain among bulk commodities. Since 2009/10 soybean imports have increased 98 per cent1, with future imports projected to increase a further 26.7 per cent2 over the next decade. China is currently the biggest player in the trade of soybeans (see figure 3). In 2019/20 China’s imports of soybeans accounted for 60 per cent of total world imports. China’s soybean imports are expected to resume their strong growth after recovering from an African swine fever epidemic that curtailed soybean meal demand during 2019/20. Driven by growth in livestock numbers and vegetable oil consumption, China’s soybean imports share in 2030/31 is projected to increase to 64 per cent2. Consequently the market price of soybeans may be very sensitive to changes in Chinese demand.
1 UDSA, FAS, World: Soybeans and Products Supply and Distribution
2 USDA, Economic Research Service, 2020 USDA Agricultural Projections to 2030
Figure 3: Global Soybean Imports, 2016-2020 (Million Metric Tonnes)
Source: USDA, Foreign Agricultural Service
The two most dominant exporters of soybeans are Brazil and the United States (see figure 4). Between 2020/21 and 2030/31 exports from Brazil are projected to increase 36.2 per cent2 in contrast to the US, where forecasts expect exports to decline 29.5 per cent2. Argentina’s soybean exports are projected to increase about 34 percent to 10.9 million tons by 2030/31, mostly to China.
Figure 4: Global Soybean Exports, 2016-2020 (Million Metric Tonnes)
Source: USDA, Foreign Agricultural Service
- Important Factors and Trends
- Biotechnology
- Soybean Rust
- Demand for Biodiesel
- Crush Spread
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 94 per cent between 1997 and 20204 (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.
4 USDA ERS, Adoption of Genetically Engineered Crop in the US
Figure 5: Adoption of Genetically Engineered Soybean Crop in the United States as a Percentage of Planted Acres, 1996-2020
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.
5 USDA, Agricultural Research Service: Invasive and Emerging Fungal Pathogens – Diagnostics Fact Sheets
6 USDA, Pest Information Platform for Extension and Education
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
- Equities
- Futures
- Exchange Traded Products
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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Wheat markets are usually in contango, reflecting the cost of storing. Markets in contango present a drag on performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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 Bloomberg Soybeans Subindex; S&P GSCI Soybeans Index; UBS Bloomberg CMCI Soybeans Index; Teucrium Soybean Fund Benchmark Index (United States).
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.
Between 2014 and 2019 the global supply of sugar decreased 5.1 per cent1, with much of this decline driven by lower output from the largest producing countries. Over this period, output in Brazil decreased 17 per cent, India fell by 2 per cent and Thailand was down by 24 per cent1. In 2019/20 the largest producers of sugar were Brazil, India and European Union (see figure 1). Global sugar production is projected to recover from the current dip and expand by 15%, from 176 Mt in the base period to 203 Mt by 2029, with 96 per cent of the projected increase originating from developing countries2. Brazil is projected to maintain its position as the world's largest sugar producer and to account for about 18% of the world's sugar output by 20292. India and Thailand are expected to progressively recover from their current low production season, with India reaching levels close to those of Brazil by 20292. 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.
1 USDA, Foreign Agricultural Service, World Sugar Production, Supply and Distribution
2 OECD-FAO Agricultural Outlook 2019-2029
Figure 1: Global Sugar Supply, 2019/20
Source: USDA, Foreign Agricultural Service
Between 2014 and 2019 world demand of sugar decreased by 0.2 per cent1, with significant growth in the Asian region. Over the last five years consumption in India was flat, China declined by 11 per cent and European Union (EU) fell by 2 per cent1. Driven by sustained economic expansion and moderate population growth, sugar demand in Asia is expected to represent more than half of global consumption by 20292. In other parts of the world, especially in high-income countries, per capita consumption will continue to decline as a result of changing consumer habits regarding sugar intake. In 2019/20 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 continue growing at around 1.4 per cent reaching 199 Mt by 2029 underpinned by population and income growth2. Over the outlook period, the average world level of per capita consumption is expected to increase from 22.5 kg/cap to 23.5 kg/cap, although considerable variations between regions and countries will occur.
1 USDA, Foreign Agricultural Service, World Sugar Production, Supply and Distribution
2 OECD-FAO Agricultural Outlook 2019-2029
Figure 2: Global Sugar Demand, 2019/20
Source: USDA, Foreign Agricultural Service
Global imports between 2014 and 2019 increased by 0.2 per cent1. This was predominantly driven by trade in Asia, where imports have helped meet growing consumption of sugar based products 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. Over the next decade, Indonesia, with a strong growth in consumption, is projected to consolidate its position as the leading sugar importer (7.5 Mt), followed by China (6.3 Mt), the United States (2.7 Mt), Malaysia (2.4 Mt), Korea (2.1 Mt) and India (1.5 Mt)3.
1 USDA, Foreign Agricultural Service, World Sugar Production, Supply and Distribution
3 OECD-FAO Agricultural Outlook 2019-2029
Figure 3: Global Sugar Imports, 2016-2021 (Million Tonnes)
Source: USDA, Foreign Agricultural Service
In 2019/20 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 36% of world exports in 2019/201 (see figure 4). 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, 2016-2021 (Million Tonnes)
Source: USDA, Foreign Agricultural Service
- Important Factors and Trends
- Bioethanol Production in Brazil
- International Trade Policies
- Substitutes
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 implementation of the biofuel program (Renovabio) will also have a significant impact on sugar markets, as Brazil has the flexibility to easily switch between the use of its sugarcane for either sugar or ethanol, depending on relative profitability.
The Intercontinental Exchange estimates that less than 50 per cent of world sugar trade occurs in a free market4. 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. As part of the reforms to the Common Agricultural Policy in 2017, European Union (EU) abolished production quotas on sugar beet production at the end of September 2017, thereby raising output and paving the way for the EU to become a net exporter for the first time in a decade.
4 Intercontinental Exchange, Sugar No. 11 and Sugar No. 16
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. Owing to its competitiveness in caloric sugary soft drinks, HFCS consumption (dry weight) is projected to grow by 14% or 1.9 Mt by 20293. China, one of the countries where sweetener consumption is low, is expected to be the main driver of the increase. Because it is the biggest world producer of starch, it is anticipated that China will increase its HFCS supply to fulfil a growing domestic demand, although a lack of profitability is likely to dampen supply growth. 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.
3 OECD-FAO Agricultural Outlook 2019-2029
- Investing
- Equities
- Futures
- Exchange Traded Products
Investors can gain indirect exposure to the sugar market by investing in publicly 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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Wheat markets are usually in contango, reflecting the cost of storing. Markets in contango present a drag on performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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 Bloomberg Sugar Index; UBS Bloomberg CMCI Sugar Index; Teucrium Sugar Fund (United States).
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.
Over the last decade global wheat production increased 11.3 per cent1, with supply projected to grow 8 per cent2 between 2020/21 and 2030/31, with higher yields accounting for most of the gains. The European Union and China are currently the two largest producers of wheat (see figure 1). The eight largest wheat exporters – the EU, Russia, Canada, the United States, Ukraine, Australia, Argentina and Kazakhstan – are projected to account for 91 percent of world trade in 2030/31. Only the EU and Ukraine exhibit increasing world export share by 2030/31.
1 USDA, Foreign Agricultural Service
2 USDA, Economic Research Service, 2021 International Long-Term Projections to 2030
Figure 1: Global Wheat Supply, 2018-2019 (Million Tonnes)
Source: USDA, World Agricultural Supply and Demand Estimates
Between 2010 and 2020 global consumption of wheat has increased 10.4 per cent1, with demand projected to increase 6.9 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). China is a major contributor to expanding wheat use, primarily due to continuing to hold large stocks and anticipated higher levels of wheat feed use2. The regions with the greatest increase in food use over the projection period are West Africa (25.1 percent), the rest of Sub-Saharan Africa (24 percent), South East Asia (17.4 percent) and North Africa (11.4 percent).
1 USDA, Foreign Agricultural Service
2 USDA, Economic Research Service, 2021 International Long-Term Projections to 2030
Figure 2: Global Wheat Demand, 2018-2019 (Million Tonnes)
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 15 per cent3 of total imports (see figure 3). World wheat trade is projected to grow 11.2 percent2 between 2020/21 and 2030/31 with imports concentrated in developing countries. Rising incomes, particularly in emerging economies with rising per capita demand, support growth in global demand and a corresponding increase in global wheat trade.
2 USDA, Economic Research Service, 2021 International Long-Term Projections to 2030
3 USDA, Economic Research Service, 2021 International Long-Term Projections to 2030
Figure 3: Global Wheat Imports, 2016-2021 (Million Tonnes)
Source: USDA, Foreign Agricultural Service
Over the projection period, the largest import increases are for Egypt, the Middle East and South East Asia, up about 20, 17 and 17 percent respectively3. By 2030/31, the EU is expected to regain its rank as the top wheat-exporter, with exports growing 2.9 percent annually to 40.0 million tons3. Rising EU exports are supported by increased production due to higher yields and a decline in domestic wheat feed use. Canada’s wheat exports are projected to grow from 25 million tons in 2021/22 to 27.1 million tons in 2030/31. Moderate production gains are due to yield growth despite a slight decline in wheat area. Declining domestic use contributes to grater exportable supplies.
Figure 4: Global Wheat Exports, 2016-2021 (Million Tonnes)
Source: USDA, Foreign Agricultural Service
- Important Factors and Trends
- Ukraine and Russia
- EM Demand
- Government Policy
- Weather
Based on USDA projections2, exports from Ukraine and Russia are likely to account for 30 percent of the projected increase in global wheat exports. Under the assumption of normal or average weather, Ukraine’s exports of wheat are expected to continue a pattern of strong growth climbing from 15.9 million tons in 2021/22 to 20.6 million tons in 2030/31. Exports from Russia are expected to grow more modestly, rising 1.5 million tons to 39.4 million tons in 2030/31. Continued improvement in farm level productivity and yields should generate the growth in domestic surpluses available for export.
2 USDA, Economic Research Service, 2021 International Long-Term Projections to 2030.
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 billion4. 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.
4 FOA, World agriculture 2030
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. Owing to its large share of exports, wheat prices tend to be very volatile when Russia restrict exports and imposes an export tax.
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
- Equities
- Futures
- Exchange Traded Products
Investors may gain exposure to the wheat industry through agribusinesses that have some involvement in the production lifecycle and trade of wheat. Publicly 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. A commodity is said to be in contango when the price of a distant Futures contract is higher than the price of a nearer future, and it is said to be in backwardation when the price of a distant Futures contract is lower than the price of a nearer future. Wheat markets are usually in contango, reflecting the cost of storing. Markets in contango present a drag on performance. For more information on contango and backwardation please see Commodity ETPs Are Exposed To Futures Contracts Not The Physical Spot. Why Does It Matter?, May 2020
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 Bloomberg Kansas Wheat Subindex Total Return, S&P GSCI Wheat Official Close Index, UBS Bloomberg CMCI Components USD Wheat Price Index, Teucrium Wheat Fund Benchmark Index (United States).