Are Commodities a Good Investment?

The looming US China trade war has been put “on hold” according to US Treasury Secretary Mnuchin. Trump tweeted that

China has agreed to buy massive amounts of ADDITIONAL Farm/Agricultural Products – would be one of the best things to happen to our farmers in many years!

However, many are skeptical and you can include Profitable Investing Tips among the skeptics. Our eventual question for our readers will be, are commodities a good investment? But, first a little background.

CNBC quotes Moody’s chief economist as saying that the proposed trade agreements are face-saving and lose-lose.

China consented to continue discussing measures under which it would purchase more U.S. products in order to reduce the $335 billion annual trade deficit between the two, but no specific dollar number was put forward. Zandi pointed to this as evidence that neither Washington nor Beijing had a plan, nor did either know what it specifically was they wanted from the ongoing talks.

“When you get right down to it, what exactly are they going to do? Are they going lower the Chinese-U.S. bilateral trade deficit? It’s just not going to happen. They’re kicking it down the road because they really don’t know what they want,” Zandi said.

The two biggest US exporters for years have been Boeing and all of US agriculture. But, will China buy another $200 billion in US Boeing jets when it really wants to develop its own aviation industry? We wrote about this in our article about whether the new Chinese passenger jet would hurt Boeing. And, if Boeing gets a substantial increase in its business with China that will probably come with agreements for technology sharing which would hurt Boeing and US exports in the long run.

Regarding US agricultural exports there is concern about being simply a commodity supplier to China. A couple of years back we wrote to beware the resource curse of boom and bust cycles.

Brazil rode high during its commodity boom and has been licking its wounds ever since. Venezuela bought friends in the Caribbean with discounted oil and now its citizens cannot find milk, diapers or toilet paper in the stores. Beware of the resource curse of boom and bust cycles in commodity dependent economies.

The issue with China is that the USA and Europe have exported much of their manufacturing supply chains to China and other nations in Asia. This was initially a good idea because it cut down on production costs. However, the result has been a worsening trade deficit in the USA, loss of jobs, and loss of the skill sets that make manufacturing work. Fixing that situation will take more than getting China to import more jets, corn, soybeans, beef, chicken, and pork products.

Are Commodities a Good Investment?

Fidelity has a good explanation of investing in commodities.

Commodity investing is investing in raw materials that are either consumed directly, such as food, or used as building blocks to create other products. These materials include energy sources like oil and gas, natural resources like timber and agricultural products, or precious metals like gold and platinum.

In the case of US exports to China these commodities would be agricultural. The up side to commodity investment is that helps you diversify your portfolio and there is always the potential for substantial profits. Also, commodities over time tend to hold their value making them a hedge against inflation.
The down side of commodity investment according to Fidelity is this.

Commodity prices can be extremely volatile and the commodities industry can be significantly affected by world events, import controls, worldwide competition, government regulations, and economic conditions, all of which can have an impact on commodity prices. There is a chance your investment could lose value.

If commodities can be a good investment, how do you invest? There are ETFs that track precious metals and there are agricultural companies and related companies that will prosper with increased production and increased exports. Monsanto, CF Industries, Mosaic, John Deere, Agrium, ADM, and ADCO are a few of the larger and more substantial choices.

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