Library/CFA (Chartered Financial Analyst)/Alternative Investments — CFA Program Curriculum (Level I, Volume 8, 2026)/Learning Module 5 Natural Resources

Learning Module 5 Natural Resources

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Overview and Asset Definitions5 min

This chapter defines natural resources as raw land, farmland, timberland, and commodities and explains their distinct investment characteristics and roles in portfolios. Farmland and timberland produce cash income from harvested outputs (crops, timber) and may benefit from biological growth cycles and commodity price changes; raw land yields returns only through price appreciation. Timberland differs from farmland because harvest timing can be chosen (trees can be stored by delaying harvest), while crops must be harvested on fixed cycles. Both farmland and timberland require specialized management and often trade infrequently in private markets, producing appraisal-based valuations and illiquidity.

Key Points

Natural resources include raw land, farmland, timberland, and commodities.
Farmland and timberland produce income plus potential price appreciation; raw land returns come only from price change.
Timberland offers harvest-timing flexibility; farmland harvests are cyclical.
Direct management requires specialized expertise; markets are illiquid and often appraisal-based.

Commodity Fundamentals and Pricing5 min

Commodity investments (hard and soft commodities) normally provide no intrinsic cash flow and are usually accessed via derivatives such as futures, forwards, and options. Physical ownership of commodities incurs costs (storage, transport, insurance) and may bring non-cash benefits (convenience yield). The spot-forward pricing relationship is governed by cost of carry and convenience yield: F0(T) = S0 e^{(r + c - i)T}. When convenience yield exceeds carrying cost the forward curve can be in backwardation; when carrying cost exceeds convenience yield it can be in contango. Commodity prices adjust slowly on the supply side because production lead times are long, especially for agricultural and mined commodities, which makes short-term supply elasticities low and prices sensitive to shocks (weather, geopolitical events).

Key Points

Commodities typically have no cash flows and are accessed via derivatives.
Owning physical commodities involves storage, transport, insurance costs (cost of carry).
Convenience yield reduces forward prices; cost of carry raises them; F0(T) = S0 e^{(r + c - i)T}.
Backwardation occurs when spot > forward (convenience yield > carry); contango when forward > spot.

Investment Forms and Management5 min

Investment forms include direct ownership, TIMOs and specialized managers for timberland, farmland funds, REITs and private partnerships for farmland or timberland, and derivatives, ETFs, CTAs, and managed futures strategies for commodities. Direct ownership provides control and tax features but carries concentration, illiquidity, and specialized knowledge needs. Indirect forms (funds, REITs, ETFs, CTAs) provide liquidity, diversification, and professional management but may have fees and tracking differences. Timberland investors often use TIMOs; farmland investors may choose owner-operator or owner-lease models. Asset-backed tokenization can fractionalize ownership but is nascent.

Key Points

Direct and indirect investment vehicles exist for land and commodities.
TIMOs manage institutional timberland portfolios; farmland funds and REITs are available.
Commodities commonly invested through futures, ETFs, and CTAs/managed futures.
Direct ownership gives control and tax benefits but increases illiquidity and requires expertise.

Risk, Return, Inflation Hedging and Diversification5 min

Key risks for natural resources include illiquidity, appraisal lag and valuation opacity, biological and weather risk, long time horizons, commodity price volatility, and political/regulatory risks in developing markets. Diversification metrics show low historical correlations between farmland/timberland and stocks or bonds; commodities correlate highly with inflation but are highly volatile. Investors should consider lead times, harvest timing flexibility, storage and inventory dynamics for commodities, cost of carry versus convenience yield for forward pricing, and the differing liquidity and return expectations across investment forms. In sum, natural resources can add diversification and inflation protection to portfolios but require specialized knowledge and careful risk management in direct or indirect investment forms.

Key Points

Risks: weather, pests, valuation opacity, illiquidity, regulatory risk, long cycles.
Commodities often hedge inflation (higher correlation with inflation); farmland/timberland less so.
Historical correlations with stocks and bonds have been low, offering diversification benefits.
Careful choice of investment vehicle and active risk management are critical for institutions.

Questions

Question 1

Which of the following best describes a primary return driver unique to timberland investing compared with raw land?

Learning Module 5 Natural Resources

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