Title LM05 Natural Resources IFT Notes.pdf ✅

LM05 Natural Resources 2025 Level I Notes © IFT. All rights reserved 1 LM05 Natural Resources 1. Introduction ........................................................................................................................................................... 2 2. Natural Resources Investment Features .................................................................................................... 2 3. Commodity Investment Forms ....................................................................................................................... 5 4. Natural Resource Investment Risk, Return, and Diversification ...................................................... 6 Summary ...................................................................................................................................................................... 8 Required disclaimer: IFT is a CFA Institute Prep Provider. Only CFA Institute Prep Providers are permitted to make use of CFA Institute copyrighted materials which are the building blocks of the exam. We are also required to create / use updated materials every year and this is validated by CFA Institute. Our products and services substantially cover the relevant curriculum and exam and this is validated by CFA Institute. In our advertising, any statement about the numbers of questions in our products and services relates to unique, original, proprietary questions. CFA Institute Prep Providers are forbidden from including CFA Institute official mock exam questions or any questions other than the end of reading questions within their products and services. CFA Institute does not endorse, promote, review or warrant the accuracy or quality of the product and services offered by IFT. CFA Institute®, CFA® and “Chartered Financial Analyst®” are trademarks owned by CFA Institute. © Copyright CFA Institute Version 1.0

LM05 Natural Resources 2025 Level I Notes © IFT. All rights reserved 3 Farmland Farmland is perceived to provide a hedge against inflation. Two types of farm crops include raw crops that are planted and harvested, and permanent crops that grow on trees. Like timberland, farmland also provides an income component related to harvest quantities and agricultural commodity prices. However, it does not provide production flexibility, as farm products must be harvested when ripe. Similar to timber land, the return drivers for farmland are: harvested quantities, commodity prices, and land price appreciation. Farmland is also considered a sustainable investment that mitigates climate-related risks. Land Investments vs. Real Estate Farmland, timberland, and raw land are similar to real estate investments in that they are unique, illiquid assets with distinct geographic location and features. However, there are also some notable differences:  Unlike real estate, there is no focus on the physical development of the land. Rather than development, the quality of the soil and climate features matter more.  The location of the land is important. The closer it is to transportation hubs and markets, the higher the price. This is because transportation expenses can be a significant component of the price of the products paid by the customers of timberland and farmland. To invest in raw land, timberland, and farmland, investors need specialized knowledge and understanding of the specifics of the natural resources. For example, to invest directly in timberland one needs forest expertise to manage a forest over its life cycle. Many institutional investors do not have this expertise, and rely on timberland investment management organizations (TIMOs)- TIMOs are entities that use their forest investment expertise to analyze and acquire suitable timberland holdings on behalf of institutional investors. Exhibit 1 from the curriculum outlines the features of land investments.
LM05 Natural Resources 2025 Level I Notes © IFT. All rights reserved 4 Features and Forms of Farmland and Timberland Investment Timberland tracts are typically thousands (or more) of acres in size, whereas farmland is frequently owned in smaller tracts of tens or hundreds of acres. As a result, farmland is more suited to family ownership, whereas timberland is more commonly owned by institutions. An advantage of institutional ownership of physical farmland, as compared to exposure to crops through futures contracts is: Futures contracts are only available on a few common crops (such as wheat and corn). Ownership of physical farmland allows for the cultivation of crops that are not traded on futures exchanges, resulting in a broader universe of agricultural product price exposures. However, the disadvantage is: there is limited price transparency or information to guide investment decisions; assistance from sector specialists is required. Direct investments are illiquid. Farmland is highly sensitive to weather changes. Bad weather conditions can drastically reduce harvest yields.