Commodities

Commodities are another asset class and are affected by a wide variety of factors including weather, supply and demand, tariffs, fuel costs, mad cow disease, bird flu, fuel costs, foreign competition, production costs, government regulation and oversight, and other factors to numerous to mention.

The growth of exchange traded funds has now made it possible to get exposure to different commodities instead of having to speculate on prices by purchasing commodity contracts.

Just like stocks, bonds, realestate and metals, commodity prices can move up or down rather dramatically when events such as drought, floods, late Springtime snowstorms, or disease occur. A common example is the rise in price of corn due to increasing ethanol production. Another might be rising orange juice prices due to a severe frost in Florida. The housing boom drove up the price of copper, which is used in wires. So much in-fact that people have gone to great lengths to steal it from cell phone towers, construction sites, and anywhere else they can find it.

The right hand column gives an overview of the different types of commodities.

Animal Products

Cattle/BeefDairyHogsPoultrySheep/Wool

With its abundant grasslands and large grain supply, the United States has developed a beef industry that is largely separate from its dairy sector. The United States has the largest fed-cattle industry in the world, and is the world's largest producer of beef, primarily high-quality, grain-fed beef for domestic and export use. The industry is roughly divided into two production sectors: cow-calf operations and cattle feeding.

The cattle cycle refers to cyclical increases and decreases in the cattle herd over time, which arises because biological constraints prevent producers from instantly responding to price. In general, the cattle cycle is determined by the combined effects of cattle prices, the time needed to breed, birth, and raise cattle to market weight, and climatic conditions. If prices are expected to be high, producers slowly build up their herd size; if prices are expected to be low, producers draw down their herds. The cattle cycle averages 8-12 years in duration, the longest of all meat animals, but the effects of persistent dry conditions on pastures and harvested forage supplies can lead to shortened or extended cycles.

Dry conditions that began in 1996 and persisted from 1998 through 2003 held down the retention of heifers until forage conditions improved. By late 2003 and 2004, grazing conditions had improved and ended a 9-year cyclical liquidation of cattle inventories. This, together with strong feeder calf prices, began the process of herd expansion through the addition of heifers and calves.

Source: U.S. Department of Agriculture

The United States is the world's largest poultry producer and the second-largest egg producer and exporter of poultry meat. U.S. poultry meat production totals over 40 billion pounds annually; over four-fifths is broiler meat, most of the remainder is turkey meat, and a small fraction is other chicken meat. The total farm value of U.S. poultry production exceeds $20 billion. Broiler production accounts for the majority of this value, followed by eggs, turkey, and other chicken.

Broiler production is concentrated in a group of States stretching from Delaware, south along the Atlantic coast to Georgia, then westward through Alabama, Mississippi, and Arkansas. The top broiler-producing State is Georgia, followed by Arkansas, Alabama, Mississippi, and North Carolina.

Most U.S. broiler production is under contract with a broiler processor. The grower normally supplies the growout house with all the necessary heating, cooling, feeding, and watering systems. The grower also supplies the labor needed in growing the birds. The broiler processor supplies the chicks, feed, and veterinary medicines. The processor schedules transportation of the birds from the farm to the processing plant. In many cases, the processor also supplies the crews who place broilers into cages for transportation to the slaughter plant.

The U.S. turkey industry produces over one-quarter of a billion birds annually, with the live weight of each bird averaging over 25 pounds. Production of turkeys is somewhat more scattered geographically than broiler production. The top five turkey-producing States are Minnesota, North Carolina, Missouri, Arkansas, and Virginia.

The United States is by far the world's largest turkey producer, followed by the European Union. Even though exports are a major component of U.S. turkey use, the United States consumes more turkey per capita than any other country.

U.S. egg operations produce over 90 billion eggs annually. Over three-fourth of egg production is for human consumption (the table-egg market). The remainder of production is for the hatching market. These eggs are hatched to provide replacement birds for the egg-laying flocks and to produce broiler chicks for growout operations. The top five egg-producing States are Iowa, Ohio, Pennsylvania, Indiana, and Texas.

The large majority of the U.S. table-egg production is consumed domestically. U.S. egg and egg product exports are a relatively minor proportion of domestic production. U.S. per capita consumption of eggs and egg products is around 250 eggs per person.

Source: U.S. Department of Agriculture

Sheep are raised for both meat (lamb or mutton) and wool. The U.S. sheep and wool industries have seen significant change since the mid-1970s, marked by smaller inventories, declining production, shrinking revenues, and fewer operations. Historically, lamb and mutton were viewed as byproducts of wool production, even though wool receipts accounted for a smaller share of revenue. As wool revenues have declined, producers have turned their attention to lamb and mutton production and the possibility of other byproducts such as sheep leather.

Inventory data on U.S. sheep began in 1867, when there were approximately 45 million sheep in the United States. Sheep numbers peaked in 1884 at 51 million head. Since then, numbers have declined to almost 6.0 million head. The number of sheep operations has declined as well. During the 1990s, sheep operations dropped from more than 106,000 to about 66,000, as producers experienced shrinking revenues and low rates of return.

Sheep producers range in size from those with small flocks to large western operations. Two types of enterprises exist: stock-sheep production and lamb feeding. Stock-sheep producers manage grazing flocks on pasture and range forage, often on arid western lands with few alternative uses. Stock-sheep producers sell lambs that are either slaughtered or placed in feedlots. Feeder lambs are raised on forage until they are around 60-80 pounds, then placed in feedlots to be fattened and finished for slaughter.

Although the sheep industry accounts for less than 1 percent of U.S. livestock industry receipts, sheep operations are important to the economies of several States. More than two-thirds of U.S. operations are located in the Southern Plains, Mountain, and Pacific regions, and the regional distribution has remained fairly constant since the early 1900s. Texas is the largest sheep producing State, followed by California.

Attempts to diversify sheep production have sparked increased interest in hair sheep production. Hair sheep have high parasite resistance and low heat stress and are known to provide multiple lambing possibilities. Apart from the ability of hair sheep to produce lamb and mutton, their leather is a viable source of revenue.

The U.S. market for lamb and mutton has weakened throughout the decades. Since the 1960s, per capita consumption has dropped from nearly 5 pounds to just over 1 pound. This is due in part to declining acceptance of lamb from a growing segment of the population, as well as competition from other meats, such as poultry, pork, and beef. Most meat is sold as lamb and comes from animals under 14 months old. Mutton comes from older animals and is often less expensive but less desirable to consumers. U.S. lamb consumers prefer high-quality cuts such as legs and loins. Some of the lower quality, less desirable cuts go to the pet-food industry or are exported.

The Northeast, with its high concentrations of Middle Eastern, Caribbean, and African consumers, is a major market for lamb products. The typical lamb consumer is an older, relatively well-established ethnic individual who lives in a metropolitan area like New York, Boston, or Philadelphia in the Northeast or San Francisco or Los Angeles on the West Coast, and who prefers to eat only certain lamb cuts. In contrast, beef, pork, and poultry buyers tend to be geographically dispersed, younger, and less ethnically oriented and to buy a wider variety of cuts.

Source: U.S. Department of Agriculture

Crops

CornSoybeansSugarWheatFruits and Tree Nuts

Corn is the most widely produced feed grain in the United States, accounting for more than 90 percent of total value and production of feed grains. Around 80 million acres of land are planted to corn, with the majority of the crop grown in the Heartland region. Most of the crop is used as the main energy ingredient in livestock feed. Corn is also processed into a multitude of food and industrial products including starch, sweeteners, corn oil, beverage and industrial alcohol, and fuel ethanol. The United States is a major player in the world corn trade market, with approximately 20 percent of the corn crop exported to other countries.

Source: U.S. Department of Agriculture

Processed soybeans are the largest source of protein feed and vegetable oil in the world. The United States is the world's leading soybean producer and exporter. Farm value of U.S. soybean production in 2003/04 was $18.0 billion, the second-highest value among U.S.-produced crops, trailing only corn. Soybean and soybean product exports accounted for 43 percent of U.S. soybean production in 2003. Soybeans equal about 90 percent of U.S. total oilseed production, while other oilseeds—such as cottonseed, sunflowerseed, and peanuts—account for the remainder. ERS analyzes events in the domestic and international oilseed markets that influence supply, demand, trade, and prices.

The major U.S. oilseed crops are soybeans, cottonseed, canola, rapeseed, sunflowerseed, and peanuts. Soybeans are the dominant oilseed in the United States, accounting for about 90 percent of U.S. oilseed production. Most U.S. soybeans are planted in May and early June and harvested in late September and October.

U.S. soybean plantings peaked at 75.1 million acres in 2004, a 30-percent increase since 1990. Increased planting flexibility, steadily rising yield improvements from narrow-rowed seeding practices, a greater number of 50-50 corn-soybean rotations, and low production costs (partly due to widespread adoption of herbicide-tolerant varieties) favored expansion of soybean acreage in the 1990s. More than 80 percent of U.S. soybean acreage is concentrated in the upper Midwest, although significant amounts are still planted in the historically important areas of the Delta and Southeast. Acreage tends to be concentrated where soybean yields are highest. (See USDA's National Agricultural Statistic Service for historical data on soybean and other oil crop acreage, yields, and prices.)

Rising yields have also encouraged expansion of soybean acreage, as new seed varieties, fertilizer and pesticide applications, and management practices have improved over time. Higher yields reduce per-bushel production costs, which enhances profitability. ERS data indicate that soybean production costs and returns for each region vary from the national average. Midwestern soybean producers generally have higher yields and lower per-acre cash costs than Southern and Eastern producers.

Data from the 2002 Census of Agriculture indicated that 317,611 U.S. farms raised soybeans in 2002, down from 511,000 in 1982. With more acreage and fewer farms, harvested soybean acreage per farm increased from 114 acres in 1978 to 228 acres in 2002. Although small farms with less than 250 acres accounted for 72 percent of the farms growing soybeans, these farms produced only 26 percent of the 2002 crop. Irrigation was used on 5.5 million acres of soybeans, or 7.5 percent of total 2002 acreage. Individual or family farms accounted for 85 percent of all soybean farms in 2002 and 73 percent of soybean production. The remainder were largely partnerships and small family-held corporations, with other corporations accounting for less than 1 percent of soybean farms and soybean production.

In the United States, soybeans are most commonly grown in a crop rotation with corn. As soybean acreage in the South has declined since the early 1980s, there is less double cropping of soybeans with winter wheat. In recent years, an increasing number of soybean farmers have adopted conservation tillage practices. With less intensive soil cultivation, weed control depends more heavily on herbicide applications. Soybean pesticide use (nearly all of which are herbicides) ranks second only to corn. Commercial fertilizer was applied to less than 40 percent of soybean acreage, a much lower rate than for most row crops (e.g., corn and cotton). Unlike other crops, soybeans can fix their own nitrogen and require minimal nitrogen fertilizer. (More information on crop production practices is available from the Agricultural Resource Management Survey.)

Soybeans were one of the first bioengineered crops to achieve commercial success. USDA now conducts a farm survey to determine the extent of the adoption of biotech crops. The data indicate that soybeans comprise the greatest number of U.S. biotech crop acres.

The popularity of bioengineered soybeans among U.S. farmers has ramifications for resource use, marketing, and international trade. Herbicide-tolerant soybeans have changed the amount and type of herbicides used by farmers. In response to consumer preferences, both domestic and foreign, grain handlers are assessing the value of segregating bioengineered soybeans from conventional varieties. The added cost for segregating nonbiotech corn and soybeans could be higher than for segregating value-enhanced crops. Differentiating biotech and nonbiotech commodities may become an issue for grain handlers. Initially, the bioengineering of oilseed crop traits has focused on improving production attributes, such as higher yields and lower costs. But enhanced functionality characteristics will soon emerge.

In the United States, nearly all soybeans are crushed to extract the oil from the resulting meal. A comparatively small amount of whole soybeans are used for seed, roasted for snacks or on-farm dairy feed, and consumed as traditional soyfoods such as tofu. Almost all soybean crushers are located near the major production regions, with good access to rail and barge carriers that transport products to Gulf of Mexico ports. For crushers, the soybean processing decision involves choosing when to commit to buying soybeans (e.g., from farmers), to processing them, and to selling soybean meal and oil (e.g., to food and feed manufacturers). The main decision variable in making binding commitments on future dates to sellers and buyers is the gross soybean processing margin. This margin equals the per-bushel revenue of soybeans processed into oil and meal minus the per-bushel soybean price. If the gross soybean-processing margin is high enough, a processor will commit soybean-processing resources for that date. If it is too low, the processor keeps the processing resources available for a future date and a higher margin.

Soybean meal is the most valuable component obtained from processing the soybean, ranging from 50-75 percent of its value (depending on relative prices of soybean oil and meal). By far, soybean meal is the world's most important protein feed, accounting for nearly 65 percent of world supplies. Livestock feeds account for 98 percent of soybean meal consumption, with the remainder used in human foods such as bakery ingredients and meat substitutes.

Soybean oil generally has a smaller contribution to soybean value, as it constitutes just 18-19 percent of the soybean's weight. Yet soybean oil accounts for about two-thirds of all the vegetable oils and animal fats consumed in the United States. It is mainly used in salad and cooking oil, bakery shortening, and margarine, as well as in a number of industrial applications. Worldwide, soybean oil is still the largest source of vegetable oil. However, the rapid growth in palm-oil output means it will likely surpass soybean oil's top ranking within a few years.

Source: U.S. Department of Agriculture

The United States is a major wheat producing country, with output typically exceeded only by China, the European Union, and, sometimes, India. During the early 2000s, wheat ranked third among U.S. field crops in both planted acreage and gross farm receipts, behind corn and soybeans.

The U.S. wheat sector enters the 21st Century facing many challenges, despite a strong domestic market for wheat products. U.S. wheat harvested area has dropped off 28 million acres, or nearly one-third from its peak in 1981, for two reasons. First is declining returns relative to other crops, stemming in large part from foreign competition. Second is the availability of alternative options under government programs. U.S. wheat exports have increased modestly since the 1996/97 marketing year, partly because of increased global trade; but the U.S. share of the global market has eroded in the past two decades.

Wheat is the principal food grain produced in the United States. Wheat varieties grown in the United States are classified as "winter wheat" or "spring wheat," depending on the season each is planted. Winter wheat production represents 70-80 percent of total U.S. production. Winter wheat varieties are sown in the fall and usually become established before going into dormancy when cold weather arrives. In the spring, plants resume growth and grow rapidly until summertime harvest. In the Northern Plains, where winters are harsh, spring wheat and durum wheat are planted in the spring and harvested in the late summer or fall of the same year.

U.S. Wheat Classes
The five major classes of U.S. wheat are hard red winter, hard red spring, soft red winter, white, and durum. Each class has a somewhat different end use and production tends to be region-specific.

Hard red winter (HRW) wheat accounts for about 40 percent of total production and is grown primarily in the Great Plains (Texas north through Montana). HRW is principally used to make bread flour.

Hard red spring (HRS) wheat accounts for about 25 percent of production and is grown primarily in the Northern Plains (North Dakota, Montana, Minnesota, and South Dakota). HRS wheat is valued for high protein levels, which make it suitable for specialty breads and blending with lower protein wheat.

Soft red winter (SRW) wheat, accounting for 15-20 percent of total production, is grown primarily in States along the Mississippi River and in the Eastern States. Flour produced from milling SRW is used in the United States for cakes, cookies, and crackers.

White wheat, accounting for 10-15 percent of total production, is grown in Washington, Oregon, Idaho, Michigan, and New York, and its flour is used for noodle products, crackers, cereals, and white-crusted breads.

Durum wheat, accounting for 3-5 percent of total production, is grown primarily in North Dakota and Montana and is used in the production of pasta.

Wheat milling byproducts—such as bran (outer seed coat of a wheat kernel), shorts (more inward layers of the seed coat that contain some starchy or floury components), and middlings (an intermediate fraction that consists of a combination of bran and shorts)—are used by feed manufacturers in the production of animal feeds.

Source: U.S. Department of Agriculture

Fruit and tree nuts are an important part of a person's diet. The typical American consumes over 280 pounds of fruit and tree nuts (fresh and processed products) each year, ranking third in per capita consumption of major food groups, next to dairy products and vegetables. Consisting of a wide array of crops and products, the U.S. fruit and tree nuts industry is an important component of the Nation's farm sector. Production is harvested from less than 2 percent of total harvested cropland but generates, on average, over $14 billion in U.S. farm cash receipts annually. During the 2000s, fruit and tree nut cash receipts averaged 13 percent of all crop receipts and 5 percent of all farm cash receipts (crops and livestock).

Domestic and international demand for fruit and tree nut products grew in the 1990s and through most of 2000s. Yet, according to the 2002 Census of Agriculture, the acres devoted to fruit and tree nut production and the number of farms declined between 1997 and 2002. Some of the factors driving this downward shift are higher labor costs relative to foreign competitors, higher land values, changing consumer preferences, technological innovation, increased costs associated with meeting the exacting requirements of export markets, and retail consolidation. Small, family, or individually run farm operations continue to dominate U.S. fruit and tree nut production. Most of the production and revenue, however, come from the few largest farms.

Despite year-to-year fluctuations, utilized production in the United States during the 1990s and early 2000s averaged 10-20 percent higher than the 1980s. That growth was in response to several factors such as:

increased domestic consumption,
expanding export markets,
technological production changes, such as the adoption of close density planting,
new propagation methods that decrease the time needed for new trees to reach bearing age from 5-6 years to 2-3 years,
the use of disease or pest-resistant, high-yielding varieties, and
greater use of early- or late-season varieties that extended typical marketing seasons for specific fruits so that growers may take advantage of market windows.

Production declines in recent years may be attributed mainly to weather and disease problems, mostly affecting citrus production.

Source: U.S. Department of Agriculture