This year didn't disappoint commodities traders. With price movements of more than 70% in some, investors were able to cash in on huge profits by playing the commodities market - it's not for the low risk, conservative investor as some swung down as quickly as they trended up. Let's look at five. (For more, see Cashing In On A Commodities Boom.)
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Farmers around the world are celebrating a bumper crop year as corn prices have seen a rare 70% gain from $3.43 per bushel in June to $5.84 on December contracts. This was due to heat and drought conditions in Russia and then later, heat and above averages amounts of rain in America's Corn Belt. This dramatic price increase is good for farmers but will it affect prices at the grocery store? Commodities experts believe that consumers won't see higher prices unless corn supply remains low in 2011.
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In 2010, oil continued to be just as volatile as always. In May of 2010, Brent Crude was trading north of $95 per barrel and just a month later it had tumbled to just shy of $74 per barrel, a dramatic loss not seen in many other commodities. Fast-forward to November, we see Brent trading at $91 with a series of wild swings along the way up.
What causes oil to be so volatile? Although many believe that organizations like OPEC, big oil companies, and other people and companies are falsely manipulating prices, in actuality, weather, geopolitical concerns and even the political environment have a dramatic effect on prices.
Another factor affecting oil prices is the quality of the information. Although there is plentiful data available that contributes to setting prices, often it is old and inaccurate. It isn't uncommon for inventory reports to be revised by more than 500,000 barrels. Although the role of speculators and traders cannot be discounted, experts believe that they don't play as large of a role as consumers believe. (To learn more, see What Determines Oil Prices?)
If you think gold is the most volatile metal of 2010, there were many other rarely talked about metals that saw much larger price movements. After spending the better part of six months trading in the teens, silver has spent the second half of 2010 rising from $18 to $30.
Although gold has the reputation of the being used for jewelery and a safe haven for investors who don't believe in the value of the dollar and other currencies, silver has a much more utilitarian purpose. Silver is used as an industrial metal used in photography,cutlery and even smartphones, as well as many other practical purposes, but what has made it rise in value?
The same reason gold continues to rise. Silver is also used by investors as a hedge against the uncertainty of other currencies, mainly the dollar and the euro. In layman's terms, currency has no more real value than the paper it's printed on but silver and gold have true value as an asset so owning it is an insurance policy should the "paper" become far less valuable. (To learn more, check out Investing In Precious Metals.)
Lean Hog futures have moved from a level of $65 to over $85 from February to August and since then, prices have continued to move violently. The price of lean hogs is affected by traditional supply and demand metrics such as the amount of slaughtered hogs per week, the average weight, the price of the carcass, and the contents of the USDA Hog and Pig report.
Also from the hog, pig belly futures, the part of the hog used to make bacon is also traded in the commodities market.
You may not know that orange juice futures trade on the open market just the same as oil. In fact, one contract of orange juice entitles you to receive a 15,000 block on frozen orange juice concentrate. Orange juice has moved from a low of $1.35 per pound to over $1.60 per pound from September to December. The large price swings in OJ are often a function of weather conditions in central and south Florida where U.S. crops are produced. A large amount of the upward move was attributed to a forecast that the Atlantic hurricane season would be worse than expected but as soon as the 2010 season ended, prices plunged 5.7%. As the "frost premium" is built back in to the price, analysts expect the price to again rise.
The Bottom Line
There are plenty of ways for the retail investor to invest in commodities. Through exchange traded funds as well as stocks in companies whose primary business is dependent on these commodities, the investor can profit on these dramatic price movements. (To learn more, check out How To Invest In Commodities.)
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