Natural Resources

### Which of the following is most associated with the idea of “land price appreciation” as a return source? - [ ] Contango and backwardation in futures markets - [ ] Storage costs in commodity trading - [ ] Roll yield on futures - [x] An increase in intrinsic land value over time > **Explanation:** Land appreciation specifically refers to an increase in the underlying value of the land itself (such as farmland or timberland). This is distinct from futures market concepts like contango/backwardation and storage costs that relate more to commodities. ### Which factor is most likely to provide a diversification benefit for a portfolio when adding commodities? - [ ] High correlation between commodity and equity prices - [ ] Commodities rarely experience volatility - [x] Historically low correlation with traditional assets like stocks and bonds - [ ] The ability to generate significant debt financing > **Explanation:** Commodities have historically demonstrated relatively low correlation with equity and bond markets, providing diversification benefits. While this relationship can shift, it’s their historically low correlation that can help reduce overall portfolio volatility. ### Raw land typically offers returns through: - [x] Potential increase in land value - [ ] Immediate consistent cash flows - [ ] High-frequency trading opportunities - [ ] Guaranteed yearly dividends > **Explanation:** Raw land does not yield an active cash flow (unless you lease it for certain uses). Typically, investors rely on price appreciation over time. Lack of immediate income is a key consideration in such investments. ### Which of the following best describes contango in the commodity markets? - [x] A situation where futures prices are higher than the current spot price - [ ] A situation where the term “spot” no longer applies - [ ] A situation where the forward price is always lower than the spot price - [ ] An assurance that investors realize gains from roll yield > **Explanation:** Contango occurs when futures prices exceed spot prices, often influenced by factors like storage costs and higher cost of carry for future delivery. ### Which scenario best depicts a long-term advantage associated with investing in farmland? - [x] Generating both operational income from crop sales and land price appreciation - [ ] Capturing high-frequency trading opportunities - [ ] Purely benefitting from immediate gold spot prices - [ ] Avoiding weather risks entirely > **Explanation:** Farmland can provide regular income through sales of crops and a possibility of land price appreciation. Weather risk, however, remains a significant consideration. ### In a backwardation market for crude oil futures: - [x] The near-month futures price is higher than a longer-dated futures price - [ ] Investors automatically lose money rolling futures contracts - [ ] Spot prices have no relationship to futures prices - [ ] Investors must trade exclusively in physical oil > **Explanation:** Backwardation is where futures prices trade below the near-month (closer maturity) or spot price. This can potentially lead to a positive roll yield for investors who consistently roll contracts forward. ### When investing in timberland, which of the following statements is typically true? - [x] Revenue can come from harvesting timber as well as potential appreciation in land value - [ ] The main source of gain is from daily trading of lumber futures - [x] Trees continue to grow biologically, potentially increasing the asset’s value over time - [ ] There is zero environmental risk to consider > **Explanation:** Timberland investors can capitalize on both the sale of timber and any appreciation in the underlying land. But environmental risks, such as pests or wildfires, can't be ignored. ### Which of the following is a potential benefit of adding natural resources to a traditional equity-bond portfolio? - [x] Reduced overall portfolio volatility - [ ] Guaranteed capital preservation in all market conditions - [ ] Elimination of currency risk - [ ] Elimination of need for due diligence > **Explanation:** An allocation to natural resources can offer diversification benefits, reducing portfolio volatility over the longer term. It doesn’t eliminate other risks, however. ### Which is most likely to heavily influence agricultural commodity prices? - [x] Weather patterns and global supply-demand factors - [ ] Daily movements in global corporate bonds - [ ] The Federal Reserve’s setting of the federal funds rate only - [ ] Technology usage in mobile device components > **Explanation:** Agricultural commodities are heavily affected by weather (droughts, floods, etc.), as well as production and consumption levels worldwide. While interest rates can have an indirect effect, primary drivers remain supply-demand and environmental conditions. ### True or False: Collateral yield refers to the profit that an investor receives from leasing out farmland to tenants. - [x] True - [ ] False > **Explanation:** This is a tricky one. Some might think “collateral yield” relates only to futures. However, in broader usage, collateral yield can refer to earnings derived from the collateral posted for a derivative or from another asset structure. If farmland is used as collateral and provides rent, that rent can be viewed as yield on the underlying collateral. While strictly in the futures context “collateral yield” usually means interest earned on posted collateral, farmland can also function as a form of collateral providing rental income, so the statement can have a kernel of truth in certain contexts.