Why Are Agricultural Commodities Important?
Agricultural commodities are staple crops and animals produced or raised on farms or plantations. Most agricultural commodities such as grains, livestock and dairy provide a source of food for people and animals across the globe.
However, some agricultural commodities have purely industrial applications. The building and furniture industries use lumber from trees, while manufacturers in several sectors use latex from the rubber tree. Wool from sheep provides fabric for the clothing industry and lanolin for skin- and hair-care products.
Some agricultural commodities serve as both a source of food and an industrial ingredient. Both humans and animals consume corn, but the commodity is also an important ingredient in fuel production. Similarly, humans eat the beef of cows, while a variety of industries use beef hide, fats and bones to create products.
Virtually every living being on the planet depends on the agricultural industry in one way or another. We eat the grains, fruits, vegetables and livestock that farmers produce; build the frames of our houses from lumber; make clothes from cotton and wool; and ride in cars with tires made from rubber.
In addition, over 1.3 billion people – nearly 20% of the global population – work in farming. In some regions of the world, such as South Asia and Sub-Saharan Africa, farming employs more people than any other industry.
The global impact of the agricultural industry is enormous. According to the Food and Agricultural Organization of the United Nations, the economic value of the agriculture industry, in constant 2010 dollars, is more than $3 trillion.
With the world population expected to climb from 7.5 billion to 11.8 billion by 2100, agricultural commodities are likely to play an even bigger role in the decades ahead.
What Are the Different Agricultural Commodities?
Agricultural commodities fall into one of six categories:
- Cereal Grains
- Other Soft Commodities
- Miscellaneous Agricultural Commodities
Farmers grow these commodities as (a) a food source for humans, (b) a food source for animals and (c) as a feedstock for fuels (in some cases).
The most common grain commodities include the following:
Grain commodities often serve similar purposes. For example, corn, oats and barley all function as food sources for livestock. Depending on price, farmers will choose one grain over the other.
As a result, most grain commodities have a strong price relationship with one another. Traders monitor the spread between grain prices to determine the relative values of one grain versus another.
These commodities resist easy classification since they serve multiple purposes. Farmers grow them for (a) the high oil content in their seeds and (b) the meal that remains after oil is extracted:
In the case of cotton, the plant fibers have their own important market in the clothing and houseware industries. Because farmers use the meal from these crops in animal feed, oilseeds often have a strong price relationship with cereal grains.
Meat commodities include (a) live animals raised for meat, hide, organs, bones and hooves and (b) cuts of meat produced during the butchering of animals:
Dairy commodities include milk, butter, whey and cheese. Markets for these commodities date back to the 19th century when traders organized the Chicago Butter and Egg Board. Today these products trade on the Chicago Mercantile Exchange (CME).
Other Soft Commodities
Soft commodities refer to commodities that are farmed rather than mined. However, most commodity traders classify cereal grains, oilseeds, dairy and meat separately.
The remaining soft commodities all have developed and liquid global markets:
Miscellaneous Agricultural Commodities
Some commodities have well-developed global markets, but don’t fit easily into the above categories:
|Commodity||Primary Uses*||Contract Size||Futures Exchange|
|Wheat||FA, FP||5,000 bushels||CBOT|
|Corn||FA,FP, FF||5,000 bushels||CBOT|
|Barley||FA,FP||20 metric tons||ICE|
|Rough Rice||FP, FF||2,000 hundredweights||CBOT|
|Cotton||FA, OL||50,000 pounds||NYMEX / ICE|
|Palm Oil||FA, FP, FF, OL||25 metric tons||CME|
|Soybeans||FA, FP, OL||5,000 bushels||CBOT|
|Feeder Cattle||FP||50,000 pounds||CME|
|Lean Hogs||FP||40,000 pounds||CME|
|Live Cattle||FP||40,000 pounds||CME|
|Cocoa||FP||10 metric tons||NYMEX / ICE|
|Coffee||FP||37,500 pounds||NYMEX / ICE|
|Sugar||FP, FF||112,000 pounds||NYMEX / ICE|
|Lumber||IU||110,000 board feet||CME|
|Rubber||IU||5 and 10 metric tons||TOCOM / SHFE|
|FA||Food source for animals|
|FP||Food or beverage source for people|
|FF||Feedstock for fuel production|
|OL||Food and/or industrial oil or lubricant|
|CME||Chicago Mercantile Exchange|
|CBOT||Chicago Board of Trade|
|NYMEX||New York Mercantile Exchange|
|TOCOM||Tokyo Commodity Exchange|
|SHFE||Shanghai Futures Exchange|
|ASX||Australian Stock Exchange|
What are the Main Global Agricultural Trends?
Several long-term trends could create investment opportunities in agriculture over the next two decades:
- Population Growth
- Agricultural Productivity
- Technology and Big Data
- Demand for Meat in China
- Global Warming
By 2040, the world’s population is expected to exceed 9 billion. Demographers forecast that three-quarters of the world will reside in Asia or Africa at this time.
Not only will population increase, but people will be richer. Most analysts agree that the greatest wealth gains will be in the developing world where people will migrate from rural areas into cities. Wealthier global citizens will mean more demand for agricultural products.
These trends could place strains on agricultural resources. Innovations in irrigation, biogenetics and land usage are among the many advances that will be needed to help feed a growing population. These innovations could produce new investment opportunities.
Emerging market economies have been growing at a much faster pace than developed economies over the last decade, and this trend is likely to continue. Seven countries – Brazil, China, India, Indonesia, Mexico, Russia, and Turkey – accounted for 24% of world economic output between 2010 and 2016. These countries comprised only 14% of global output in the 1990s.
However, despite these gains, productivity in agriculture is lagging badly in the developing world. A report by the Global Harvest Initiative (GHI) shows that productivity by small farmers in the lowest-income countries is growing at 1.3%. The average rate of productivity growth across all countries is 1.73%, which is below the 1.75% level needed to keep up with global demand.
To keep up with the demands of a growing world population, the agriculture sector in the developing world will need to increase its efficiency. Investors may find opportunities to invest in industries that help modernize small farms.
Technology and Big Data
Technology is one way that farms can drive productivity gains. Technology and Big Data are increasingly driving decisions by farmers. Crop monitoring technologies, apps that tell farmers the optimal time and place to plant crops and advanced DNA testing of livestock are among the many technological innovations in farming.
Modern farms will need to integrate the latest technologies into their operations in order to boost productivity and take on competition. However, in many areas of the developing and some areas of the developed world, there is a severe skills gap.
In order to bridge this gap, farms of the future will have to recruit an educated and technology-savvy workforce. Investors may find opportunities to invest both in the technology that farmers use and the human resources to help them employ it.
Demand for Meat in China
With annual spending of more than $300 billion annually, China is the largest meat consumer in the world. Meat consumption has been growing for the past two decades, and analysts expect growth of 3 to 4% annually for all proteins in the years ahead. The rising middle class in China is the main catalyst for this growth.
This trend will have enormous implications for global agricultural markets. China will require more grains to raise livestock and may need to import them. In addition, China is planning to invest heavily in the infrastructure required to modernize production and processing plants for beef, pork, poultry and fish.
Gradual changes in global temperatures can increase the number of severely hot days in the growing season. These heat waves can dramatically reduce crop output and create price spikes.
Farmers are using genetics to develop more heat-resistant strains of crops. Investments in biogenetics may benefit as a result of increases in global temperatures.
Top Agricultural Producing Countries
|Commodity||Flag||Top Producing Country||Annual Production|
|Barley||European Union||58,765 (thousand metric tons)|
|Cocoa||Ivory Coast||1,449 (thousand metric tons)|
|Coffee||Brazil||2,595 (thousand metric tons)|
|Corn||United States||377,500 (thousand metric tons)|
|Cotton||India||30,000 (1000 480 lb. Bales)|
|Feeder Cattle||United States||12,448 (thousand metric tons)|
|Lean Hogs||China||54,750 (thousand metric tons)|
|Live Cattle||United States||12,448 (thousand metric tons)|
|Lumber||United States||357 million m³|
|Oats||European Union||8,002 (thousand metric tons)|
|Orange Juice||Brazil||1,257 (thousand metric tons)|
|Palm Oil||Indonesia||36,000 (thousand metric tons)|
|Pork Bellies||China||52,750 (thousand metric tons)|
|Rough Rice||China||146,000 (thousand metric tons)|
|Rubber||Thailand||4,305 (thousand metric tons)|
|Soybeans||United States||17,024 (thousand metric tons)|
|Sugar||Brazil||39,150 (thousand metric tons)|
|Wheat||China||126,000 (thousand metric tons)|
|Wool||Australia||478 (thousand metric tons)|
Traders can follow the broad agricultural market by monitoring the performance of some of the main indices that track the sector.
The following agriculture indices are a good barometer for investment demand in the sector since they measure the performance of agricultural commodity futures.
5 Leading Agriculture Indices
|S&P GSCI Agriculture Index||This sub-index of the S&P GSCI provides investors with a reliable and publicly available benchmark for investment performance in the agricultural commodity markets.|
|Dow Jones – UBS Grains Sub Index Total Return||Index composed of three futures contracts on grains traded on US exchanges.|
|iPath Bloomberg Agriculture Total Return||Index composed of seven futures contracts on agricultural commodities traded on US exchanges.|
|iPath Bloomberg Livestock Total||Index composed of two livestock commodities contracts (lean hogs and live cattle) traded on U.S. exchanges.|
|E-TRACS USB Bloomberg Commodity||The first investable commodity index to provide direct exposure to food. The index tracks the collateralized returns generated from a basket of 11 agricultural and livestock futures contracts spread across three constant maturities from three months up to one year.|
What Are The Top Agriculture Investment Resources?
Investors can find additional information on investing in agriculture from the following sources:
United States Department of Agriculture (USDA)
The Economic Research Service (ERS) of the USDA provides comprehensive information on agricultural commodities including production, consumption and import and export statistics. The ERS also offers forecasts and analyses for each agricultural sector and publications and reports on a vast array of agriculture-related topics.
Food and Agricultural Organization (FAO)
This United Nations agency has over 194 member states and a presence in over 130 countries. The FAO website publishes reports and statistics on a broad spectrum of agricultural topics. The FAOSTAT database is an excellent tool for analyzing and comparing agricultural data using dozens of different variables (e.g., countries, production, trade, prices, land use, etc.)
Industry Trade Groups
Industry group websites are a great way to learn about the different sectors of agriculture. These organizations publish timely content on issues that impact their sectors (e.g., trade, government regulations, conservation initiatives, etc.). National Pork Producers Council, National Corn Growers Association, National Cotton Council of America and International Rubber Study Group are just a small handful of the of the organizations that advocate for their sectors.
This website, powered by Farm Journal, has comprehensive current content on agriculture topics. Agweb aggregates news stories, market data and government reports on the sector. It also publishes market analyses and discussions on weather, crops, agribusiness, machinery, livestock and technology.
This American financial company operates futures and options exchanges including the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (NYMEX). The CME publishes daily volume and open interest reports for agricultural commodities, educational courses on agricultural commodities trading, trading tools, brokerage resources and much more.
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