Emerging Markets / July 18, 2016

Mineral versus Agricultural Commodities

Commodities are naturally occurring raw materials that have low or no added value. Normally, these raw materials are transferred to manufacturing centers where they are processed and eventually sold as consumer goods. Commodities can be divided into two main groups, mineral commodities and agricultural commodities. The mineral commodities category includes naturally occurring metals such as copper, gold, and silver, as well as petroleum, even though this last one is technically not a mineral. On the other hand, agricultural commodities include coffee, sugar, cocoa, corn, coconuts, and soybeans, just to name a few.[google_chart id=2000 /]There are intrinsic differences in the nature and economics of each commodity category. Below are some of the characteristics for each group.

Petroleum & Mineral Commodities

This commodity category is composed of naturally occurring solids and liquids that are extracted from the earth and thereafter transformed into consumer goods. Commodities such as gold, copper, silver, and oil are found in specific geographic areas throughout the world. Furthermore, these minerals are the product of natural processes that have taken place along millennia. Therefore, mineral commodities are finite and highly coveted. For example, it is expected that copper and gold reserves will only last another 25 to 60 years depending on the rate of global demand. Particularly, considering that a mineral such as copper is used in household appliances, including the everyday electronics that are emblematic of the expanding middle class (see Catering to the Expanding Middle Class). An analogous dynamic is occurring with petroleum resources as exploitation continues and accelerates.

Agricultural Commodities

Similar to mineral commodities, agricultural commodities can only flourish in certain parts of the world, mainly in tropical climates, where most crops can be successfully cultivated. However, unlike mineral commodities, agricultural commodities are not finite, but rather renewable as long as the climatological conditions allow agriculture to take place. Likewise, the yields of agricultural commodities are long-term, given that they require an up-front investment and it can take years for specific crops to become productive. Such is the case of the highly lucrative cocoa tree, mainly cultivated in West Africa and Latin America. Average cocoa trees take approximately five years to reach maturity and bear productive fruit.

Even though every commodity is unique, agricultural projects should be cultivated using economies of scale and should allow soil rotation to take place as required by each specific crop. One of the advantages of agricultural commodities is that they yield substantial by-products that are useful and marketable. For example, coconuts have a variety of uses; from coconut water and milk to the coconut meat and the husks, which are used as fertilizer or biomass. Furthermore, the average palm tree has a productive life of up to 60 years before needing to be replaced.

Commodity Markets

Commodities, both mineral and agricultural, are an essential part of the economy and are traded worldwide. Furthermore, commodities represent a tangible investment that can be touched, stored, and even tasted. During the 21st century, different types of commodities will yield profits for both the long and short-term investor. However, individuals interested in commodity markets should be aware of the particular characteristics of each product.

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