When it comes to investing in commodities, there are a number of factors to consider. Investors research everything from how the commodities are used down to the nuts and bolts of how specific futures trade. While there are a number of things to keep in mind when making a commodity allocation, the production side of the equation is perhaps the most important. A number of popular commodities are produced or mined in very specific areas of the world, as certain geological or climate conditions yield vastly different results [see also Top Seven Strangest Commodity Futures].
Some commodities, however, are almost exclusive to small countries or regions, making them very susceptible to the issues and trends in the underlying country itself. Anything from a dry season to a worker’s strike can have a major impact on the underlying prices of the particular commodities. Below, we outline three important commodities that are handcuffed to very targeted areas of the world, and how it may effect you as an investor:
Cocoa is a member of the softs family, and is an investor favorite as its contracts are no stranger to volatility, creating an enticing risk/reward profile. When it comes to production, cocoa beans are derived from cocoa trees, the majority of which reside in West Africa. Overall, Africa makes up about 70% of the world’s cocoa production, but the Ivory Coast is the clear front-runner. This nation produces the most cocoa in the world, and nearly doubles the output of Indonesia, the second-ranked producer.
The Ivory Coast is obviously an emerging market, putting cocoa prices at the mercy of its political woes as well as all of the growing pains associated with a developing nation. In fact, the nation saw an extra bout of turmoil after a hotly contested election saw incumbent Laurent Gbagbo refuse to give up power to Allassane Ouattara in 2010′s presidential race. Outattara, along with the backing of international organizations, ordered his fellow countrymen to halt all exports of the vital cocoa crop until Gbagbo left the political scene. This move looked to starve the incumbent of vital cash and also helped to push up world prices of the crop by nearly 10% in a matter of weeks before the ban was ultimately lifted in Spring of this year. Clearly, investors who enjoy trading these contracts should carefully monitor this country; staying up to date on the news of this nation can make for predictable and profitable trading in a commodity known to exhibit high daily swings [see also Ultimate Guide To Cocoa Investing].
Platinum is an elusive precious metal that is most often used in cars. Though gold is the popular safe haven metal, platinum gets a fair amount of attention from investors seeking an asset to ride out volatile equities. South Africa takes the cake for platinum production, as the country accounted for approximately 75% of global production in 2010. South Africa is also home to 95% of the world’s proven reserves, leaving the fate of platinum hinging on yet another emerging market.
South Africa has a history of instability, and with platinum relying heavily on big miners, who often endure major strikes from their workforce, its price has the potential for major swings. In fact, Anglo Platinum, the world’s largest platinum producer, accounts for close to two-fifths of the total output of the metal. With such a large amount of production coming from such a controversial company– there are several lawsuits against the firm for mining on tribal lands– investors must pay close attention to the political happenings in the nation. So, while the auto industry is a major price driver for platinum, investors of this precious metal must keep an eye on this nation and its chokehold on the rare commodity for more clues on how the price of platinum may trend in the near future [see also Ultimate Guide To Platinum Investing].
Rare Earth Metals
Rare earth metals are a group of 17 metals (such as lanthanum and cerium) that are used for a variety of high tech gadgets that are vital to modern life. Current uses include includes everything from infrared lasers to magnets and capacitors. When it comes to the production and location of these metals, China has the world by the tail as it accounts just over 95% of global production of these commodities.
China is rapidly developing, but still a volatile market, and with control over so much of the world’s supply of these metals, their policy will have a major impact on prices. A major factor for investors to consider is China’s history of somewhat radical policies that tend to have significant ramifications for the global economy. Specifically, China has moved to ban exports of these vital resources to countries around the globe, forcing many high-tech companies to scramble for alternate supplies. While some accuse the surging nation of doing this to keep others behind on the development front, the fact remains that China is growing at a rapid pace and likely needs more of these products for its own economy. Beyond this risk, investors must also consider that because China produces so much of the rare earths, their supplies are being depleted at an alarming rate, which could cause prices to spike as reserves quickly become tapped out, forcing China to increase bans for more products in the near future [see also The Guide To The Biggest Companies In Every Major Commodity Sector].
Disclosure: No positions at time of writing.