Technical University Munich Commodities as an Asset Class - risklab

2.1 The different Commodity Types
world’s demand for cocoa is negatively correlated to inflation by -0.2. 28 Production
depends on the number and characteristics of the ever green tropic cocoa trees
planted 5 to 6 years ago what results in an inability to react to unexpected short
term demand. 29 An other unstable factor in this market is the political situation
of the major producing countries. Cote d’Ivories has just ceased its civil war but
still, there are political queries what cause a production decrease. In 2007 the cocoa
market is likely be nervous because Africa has to fight against a cocoa moth plague.
2.1.3.2 Grains exemplified by Corn
Corn is a member of the grass family of plants and is a native grain of the American
continent. About 5,000 BC, it was first cultivated in Central America to use it as
human food. The cereal was brought to Europe and North America, but remained
poorly grown until the 19th century. Corn is a resistant plant only vulnerable to early
frosts in fall that can be grown in different climates ranging from arid to tropical
and in different regions ranging from flat country to mountain side. Today, corn
accounts for about 70% of the world coarse grain trade and about 75% of its yearly
production are used for animal feed. 30 A small amount of around 15% is still used
in human food mainly for oil and vegetarian food and the remaining percentages are
used for alcohol distilleries and the production of ethanol for engines. Latter part
of usage is expected to increase considerably caused by the high oil prices. Today
around 95% of North America’s ethanol is made from corn. Programs on ethanol
production from corn will therefore have a constant influence on corn prices in the
future. 31
By far the biggest producer worldwide is the USA with around 40% of share of total
world production in 2006. 32 It reached its production high so far in 2004 with a
total output of 300 million tonnes, i.e. 80 million tonnes (= 25%) more than in
2006. Figure 2.12 shows the worldwide development of inventory, production and
consumption and the equivalent year ending prices. 33
Low prices since the end of the 90s have made corn business unattractive and
Figure 2.12 clearly shows that inventories have fallen since then. Calculating the
28 Thus, it can be assumed that a decline in prices of 10% results in an increase in demand of 2%.
29 A single tree can produce 20 fruits but it needs 400 to get one pound of chocolate.
30 See [The CRB Commodity Yearbook 2005].
31 See [USDA Grain 2006].
32 Moreover, the USA is the biggest exporter worldwide with around 70% of share of world corn
trade showing world’s corn supply dependence of US production output.
33 See [USDA Grain 2006] and [The CRB Commodity Yearbook 2005].
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