steel, which ensures that nickel will play an important role for years to come.
✔ Zinc: The fourth most widely used metal in the world, zinc is sought after for its resistance to corrosion. It’s used in galvanization, in which zinc coating is applied to other metals, such as steel, to prevent rust.
Food is the most essential element of human life, and the production of food presents solid money-making opportunities. In this book you find out how to invest in the agricultural sector in everything from coffee and orange juice to cattle and soybeans:
✔ Coffee: Coffee is the second most widely produced commodity in the world, in terms of physical volume, behind only crude oil. Folks love a good cup of coffee, and this provides good investment opportunities.
✔ Cocoa: Cocoa production, which is dominated by a handful of countries, is a major agricultural commodity, primarily because it’s used to create chocolate.
✔ Sugar #11: Sugar is a popular food sweetener, and it can be a sweet investment as well. Sugar #11 represents a futures contract for global sugar.
✔ Sugar #14: Sugar #14 is specific to the United States and is a widely traded commodity.
✔ Frozen concentrated orange juice – type A: FCOJ-A, for short, is the benchmark for North American orange juice prices because it’s grown in the hemisphere’s two largest regions: Florida and Brazil.
✔ Frozen concentrated orange juice – type B: FCOJ-B, like FCOJ-A, is a widely traded contract that represents global orange juice prices. This contract gives you exposure to orange juice activity on a world scale.
✔ Corn: Corn’s use for culinary purposes is perhaps unrivaled by any other grain, which makes this a potentially lucrative investment. Check out Chapter 10.
✔ Wheat: According to archaeological evidence, wheat was one of the first agricultural products grown by man. It’s an essential staple of human life and makes for a great investment.
✔ Soybeans: Soybeans have many applications, including as feedstock and for cooking purposes. The soybean market is a large market and presents some good investment opportunities.
✔ Soybean oil: Soybean oil, also known as vegetable oil, is derived from actual soybeans. It’s used for cooking purposes and has become popular in recent years with the health-conscious dietary movement.
✔ Soybean meal: Soybean meal is another derivative of soybeans that’s used as feedstock for poultry and cattle. It may not sound sexy, but it can be a good investment.
✔ Live cattle: For investors involved in agriculture, using the live cattle futures contract to hedge against price volatility is a good idea.
✔ Feeder cattle: Whereas the live cattle contract tracks adult cows, the feeder cattle contract hedges against the risk associated with growing calves. The markets don’t widely follow this area, but it’s important to figure out how this market works.
✔ Lean hogs: They may not be the sexiest commodity out there, but lean hogs are an essential commodity, making them a good trading target.
✔ Frozen pork bellies: Frozen pork bellies are essentially nothing more than good old bacon. This industry is cyclical and subject to wild price swings, which provides unique arbitrage trading opportunities.
Chapter 2
The Pros and Cons of Commodities
In This Chapter
▶ Examining strong reasons to consider commodities
▶ Acknowledging the inherent downsides
▶ Managing risk when investing in commodities
Commodities have traditionally been considered the black sheep in the family of asset classes; for several decades, no respectable money manager wanted anything to do with them. This traditional lack of interest (which no longer applies, by the way) has generated a lot of misinformation about commodities. As a matter of fact, probably no other asset class has suffered through so much misunderstanding and misconception.
Many investors are scared of venturing into the world of commodities. For one thing, it seems that every time the word commodities is uttered, someone pops up with a horrible story about losing their entire life savings trading soybeans, cocoa, or some other exotic commodity. Even though this negative perception is rapidly changing, commodities are still often misunderstood as an investment. I actually know some investors who invest in commodities (and who have made money off them) but who don’t understand the fundamental reasons commodities are such a good long-term investment.
In this chapter, I show you why commodities are an attractive investment and why many investors are becoming more interested in this asset class. Then again, I believe that many investors are afraid of commodities because they don’t know much about them. My further aim in this chapter is to shed some light on the issues surrounding commodities so that you can invest with confidence. I’m not denying that commodities present some risk – all investments do. And so I give you some tools to minimize and manage those risks.
Why the 21st Century Is the Century of Commodities
Since autumn 2001, commodities have been running faster than the bulls of Pamplona. The Reuters/Jefferies CRB Index (a benchmark for commodities) nearly doubled between 2001 and 2006. During this period, oil, gold, copper, and silver hit all-time highs (although not adjusted for inflation). Other commodities also reached levels never seen before in trading sessions.
Many investors wondered what was going on. Why were commodities doing so well when other investments, such as stocks and bonds, weren’t performing? I believe that we’re witnessing a long-term cyclical bull market in commodities. Because of a number of fundamental factors (which I go through in the following sections), commodities are poised for a rally that will last well into the 21st century – and possibly beyond that. It’s a bold statement, I know. But the facts are there to support me.
Consider an example. During the first few months of 2006, commodities outperformed every asset class, with some commodities breaking record levels. Gold and copper both hit a 25-year high. Then during the week of May 15, commodities saw a big drop. The Reuters/Jefferies CRB Index fell more than 5 percent that week, with gold and copper dropping 10 and 7 percent, respectively.
Many commentators went on the offensive and started bashing commodities. “We are now seeing the beginning of the end of the rally in commodities,” said one analyst. A newspaper ran the headline “Is This the End of Commodities?” An endless number of commentators hit the airwaves claiming that this was a speculative bubble about to burst. A respected economist even compared what was happening to commodities to the dotcom bubble: “There is no fundamental
