When Commodities Attack!http://www.fool.com/investing/general/2010/12/29/when-commodities-attack.aspx Jacob Roche
December 29, 2010
You know about stocks and bonds, but there are a few other investment classes out there that most individuals don't think much about, especially as they relate to individual companies. One is foreign exchange, which I've already talked about. Another is commodities, probably the world's oldest investments. Almost every type of business relies on commodities in some way, making it important for every investor to think about the broad implications of how their companies operate.
In a nutshell, commodities are raw materials like steel, cotton, sugar, or coffee beans. They are "fungible," which means they are the same no matter who produces them. Thus, extrinsic things like brand don't factor into the price of a commodity, only supply and demand. Unfortunately, supply and demand have their own problems.
For many important commodities like cotton or coffee beans, production is done mostly in a few areas of the world, so supply can be affected by currency risk, or even weather. Political risk is also a factor when a commodity is concentrated in one region, as we've seen with Middle East oil. Recent Chinese actions involving rare earths exports are also causing some worry about limited geographic scope of commodities production.
All the beans are in one basket
Meanwhile, bad weather in China already damaged cotton crops, which, coupled with the flooding in Pakistan this summer, has caused cotton prices to nearly double in the past six months, putting a damper on third-quarter margins at clothing manufacturers like Hanesbrands (NYSE: HBI ) and Abercrombie & Fitch (NYSE: ANF ) .