- CFA Exams
- 2023 Level II
- Topic 8. Alternative Investments
- Learning Module 39. Introduction to Commodities and Commodity Derivatives
- Subject 2. Life Cycle of Commodities
Subject 2. Life Cycle of Commodities PDF Download
The life cycle of commodities varies considerably. For example, agriculture and livestock have well-defined seasons and location-specific growth cycles, while the life cycle of energy and metal sectors is affected by seasonal demands which depend on many other factors.
In general, the shorter the life cycle, the quicker the market adjusts to external changes (e.g., weather, storage).
Oil exploration, pipelines, and refineries are very expensive. Crude oil must first be processed for later use. Natural gas requires very little additional processing after extraction. Refined products have a number of potential processing steps, depending on the input quality and demand.
Their life cycle is flexible because of relative ease of storage and lack of seasonality. Buyers and sellers can even match their needs with contracts on a monthly basis. Economies of scale are a key consideration, as most plants are capital-intensive; it's not easy to "change gear."
Good weather and lower feed costs can shorten the life cycle of livestock, which ranges from a few weeks for chickens to a few years for cattle. Advances in cryogenics technologies have given more flexibility to suppliers in response to differences in global demand and production costs. Suppliers also use the futures market to hedge against risk.
For example, coffee is harvested somewhere all year around. Futures contracts can be used for farmers to hedge against the price of input and final products.
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