Commodity Life Cycles

The life cycle of commodities differs significantly depending on the economic, technical, and structural (i.e., industry, value chain) profile of each commodity and the sector.

The commodity life cycle has an impact on the following aspects:

• It reflects and magnifies the modifications in storage, weather, and political or economic events that shift supply and demand.
• It feeds into the economics for the valuation and shape of the commodity supply and demand curves, plus their respective price elasticities of demand and supply.
• It builds an understanding of, and ideally, the ability to forecast what drives market actions and commodity returns.

Energy

$$\small{\begin{array}{l|l|l|I|} \textbf{Stages} & \textbf{Process} & \textbf{Duration} & \textbf{Activity}\\ \hline \textbf{Step 1} & {\text{Extraction}}& \text{5-100 days} & {\text{Surveys and drilling}\text{ is done and well is dug.}\\ \text{ Siphoning of crude oil}\text{ and natural gas begin.} \\ \text{ The fracturing process}\text{ for shale is applied}}\\ \hline
\textbf{Step 2} & \text{Transportation} & \text{1-10 days} &{\text{Done via truck, pipe, ship}\text{ or train to a storage}\\ \text{ facility, refinary or consumer.}} \\ \hline
\textbf{Step 3} & \text{Storage} &\text{Days- Months}&{\text{Crude is stored in tankers.} \text{ Natural gas can be}\text{ delivered directly to the consumer.}\\ \text{ During winter, the gas}\text{ is stored in tankers.}} \\ \hline \textbf{Step 4} & \text{Trading} & \text{N/A}& {\text{Crude oil requires more}\text{ processing, however natural}\text{ gas is consumed at}\text{ this stage.}}\\ \hline \textbf{Step 5} & \text{Refining} & \text{3-5 days} &{\text{Cracking where crude is}\text{ distilled into its parts.}\\ \text{ Heating is done to boil}\text{ off components that are}\text{ cooled down and collected}\text{ ,e.g Gasoline.} }\\ \hline \textbf{Step 6} & \text{Transportation and trading} & \text{5-20 days} & {\text{Consumption of crude oil products}\text{ occurs at this point.}\\ \text{ Oil commodity futures are traded}\text{ at this point.}} \\ \end{array}}$$

The factors affecting the life cycle of oil production and natural gas include;

• Refineries are quite expensive to construct depending on the processes required to distill and purify the oil.
• Damage to oil refineries due to political unrest.
• The cost of oil explorations is generally high, especially in deep offshore locations or geographically remote (or geopolitically risky) regions.

Industrial/ Precious metals

$$\small{\begin{array}{l|l|l|} \textbf{Stages} & \textbf{Process} & \textbf{Activity}\\ \hline \textbf{Step 1} & {\text{Extraction}}& {\text{Ore is removed via a mine or open pit}}\\ \hline
\textbf{Step 2} & \text{Grinding}&{\text{Ore is ground into powder}\\ \text{ to facilitate the purification process.}} \\ \hline
\textbf{Step 3} & \text{Concentrating} &{\text{Enriching the ore via froth floatation}\\ \text{ where unwanted material sinks to the bottom and is removed.} } \\ \hline \textbf{Step 4} & \text{Roasting} & {\text{Powdered and enriched ore is heated to 500-700}\\ \text{ degrees celsius to get rid of sulfur}\text{ ,the solid ore known as calcine is dried.}} \\ \hline \textbf{Step 5} &\text{Smelting}&{\text{The solid calcine is heated and melted at 1200}\\ \text{ degrees celsius and more slag is removed.}} \\ \hline \textbf{Step 6} &\text{Converting}&{\text{ Air is blown into the liquid forming 99% pure copper.}} \\ \hline \textbf{Step 7} &\text{Electro-refining}&{\text{ The blister is reshaped into anodes through electrolysis resulting in 99.99% pure metal.}} \\ \hline \textbf{Step 8} &\text{ Storage/Logistics}&{\text{ The purified metal is held typically in bonded warehouse until shipped to consumers.}}\\ \end{array}}$$

Livestock

The life cycle for livestock is considerably affected by the weather. Access to high-quality pasture and feed accelerates weight gain, leading to fluctuations in the availability of animals ready for slaughter.

The timing to maturity typically increases with size, with poultry maturing in a matter of weeks, hogs in months, and cattle in a few years.

The factors that affect the life cycle of livestock include:

• Risk of spoilage: Advances in cryogenics (freezing) technologies concerning chicken, beef, and pork mean that increasingly these products are moving from one part of the world to another in response to differences in production costs and demand.
• Demand from emerging markets: The development of middle-class consumers capable of purchasing meat protein as a regular part of their diet has increased interest and investment in the livestock and meatpacking industries.
• Hedging: Ranchers and slaughterhouses trade hog and cattle futures to hedge against their processed meat commitments.

Grains

$$\small{\begin{array}{l|l|l|} \textbf{Stages} & \textbf{Process} & \textbf{Activity}\\ \hline \textbf{Step 1} & {\text{Land tiling and planting}}& {\text{Planting of seeds in the ground}\text{ after land preparation.}}\\ \hline
\textbf{Step 2} & \text{Growth}&{\text{Emerging of seedlings}\text{ to plant maturity.}} \\ \hline
\textbf{Step 3} & \text{Pod/ ear/ head formation} &{\text{The creation of food grain.} } \\ \hline \textbf{Step 4} & \text{Harvest} & {\text{Grain collection by the farmer.}} \\ \end{array}}$$

The grain life cycle is affected by the following:

• Weather conditions: Grains in the northern hemisphere follow a similar growth cycle with a corresponding but opposite growth cycle in the southern hemisphere.
• Storage conditions: Poor standards and logistics can result in a substantial loss of value to grains. For the hygienic standards to be maintained, specialized port facilities, packing houses, and vehicles are used.
• Hedging: Farmers and consumers can trade futures to hedge their exposure to the crop in question. The contract delivery months reflect the different times of the growing cycles.

Soft Crops

Coffee which is a widely grown commodity is practically harvested almost all year round and follows the process below:

$$\small{\begin{array}{l|l|l|I|} \textbf{Stages} & \textbf{Process} & \textbf{Duration} & \textbf{Activity}\\ \hline \textbf{Step 1} & {\text{Planting}}& \text{Varied} & {\text{Tiling and planting}\text{ of seeds is done.}}\\ \hline
\textbf{Step 2} & \text{Growth} & \text{2-4 years} &{\text{The fully grown coffee plant}\text{ bears fruit called cherry}} \\ \hline
\textbf{Step 3} & \text{Harvesting} &\text{2-3 weeks}&{\text{Harvesting takes place in several} \text{ sweeps since cherries ripen}\text{ at different times.}\\\text{ The harvested cherries are then dried}\\ \text{ using the dry method by}\text{ laying them out in the sun}\text{ or wet method where water}\\ \text{ is used to soak the cherries}\text{ to remove the soft}\text{ pulp and the bean is}\\ \text{ fermented for 12-48hrs}\text{ and then the bean is}\text{ dried either by sun or a dryer.}} \\ \hline \textbf{Step 4} & \text{Storage and transportation} & \text{Varied}& {\text{The “green beans” are hulled,}\text{ sorted and bagged, then}\\ \text{ transported via ship to}\text{ their foreign markets.}} \\ \end{array}}$$

Question 1

Which of the following is most likely a primary difference in the production life cycle of crude oil and natural gas?

1. Natural gas is not transported via ships.
2. Natural gas requires very little additional processing and can be used in its natural state after extraction compared with crude oil.
3. Only crude oil needs to be stored.

Solution

The correct answer is B.

Natural gas can be used within a short time frame after it is extracted from the ground, but crude oil must first be processed for later use.

A is incorrect. Both oil and natural gas can be transported by ships.

C is incorrect. Both oil and natural gas are stored before usage.

Question 2

Which of the following factors is most likely to impact livestock as a commodity?

1. Geopolitical risks.
2. Weather conditions.
3. Commodity price fluctuations.

Solution

The correct answer is B.

Weather conditions, access to high-quality pasture, and feed accelerate weight gain leading to fluctuations in the availability of animals ready for slaughter.

A is incorrect. Geopolitical risk majorly affects the energy commodities in terms of trade restrictions and political unrest, leading to oil refineries’ destruction.

C is incorrect. Generally, ranchers and slaughterhouses trade hogs and use cattle futures to hedge against their processed meat commitments.

Reading 35: Introduction to Commodities and Commodity Derivatives

LOS 35 (b) Compare the life cycle of commodity sectors from production through trading or consumption.