Investing in fertilizer–mining companies in times of food scarcity

The primary goal of the paper is to show the validity of investing capital in fertilizer–mining companies, both from a market return perspective for individual or institutional investors, or from a hedging standpoint for insurance companies and other economic actors exposed to inflation risk and high agricultural commodity prices. After providing some elements on the fertilizer market and describing the joint dynamics of corn, wheat and fertilizer prices over the last decade, we analyze an exhaustive sample of listed fertilizer producing companies over the years January 2004–December 2012. We show that their shares generated quite good returns over the whole period and extremely high ones during the years January 2004–December 2007, both in absolute terms and compared to their betas. We also exhibit that these returns display higher sensitivities to major agricultural indexes than to the World Bank Fertilizer Index, making the hedging argument quite compelling.     

Theory of storage,inventory and volatility in the LME base metals

The theory of storage, as related to commodities, makes two predictions involving the quantity of the commodity held in inventory. When inventory is low (i.e. a situation of scarcity), spot prices will exceed futures prices, and spot price volatility will exceed futures price volatility. Conversely, during periods of no scarcity, both spot prices and spot price volatility will remain relatively subdued. We test these predictions for the six base metals traded on the London Metal Exchange (aluminium, copper, lead, nickel, tin and zinc), and find strong validation for the theory. Including Chinese inventories reported by the Shanghai Futures Exchange strengthens the relationship further. We also introduce the concepts of excess volatility, inventory-implied spot price and inventory-implied spot volatility and illustrate some applications.