Commodities are raw materials either used directly such as food used indirectly to produce another product. For example, oil is a commodity that’s used in the production of many different goods and services. You can purchase physical goods, invest in stocks, purchase ETFs that track specific commodity indexes or invest in commodity futures. Commodity futures are agreements to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future.
You can diversify when you invest in commodities by spreading them over various asset classes. Diversifying your portfolio can help shield your money against inflation. It's important to remember, however, that diversification and asset allocation do not guarantee returns.
There are a few ways you can get around inflation:
- Use real estate as a hedge. When inflation starts to bust out of its box, you can bet that real estate goes up with it. Owning real estate during times of increasing inflation means you can charge more for rent to boost your income.
- Invest in TIPS. Treasury Inflation-Protected Securities (TIPS), while not super exciting, can protect you against inflation. TIPS principal increases with inflation and decreases with deflation. You receive the adjusted principal or original principal (whichever is higher) when the TIPS mature.
- Equity investments can benefit you. Equities can preserve your portfolio against the downsides of inflation.
- Consider REITs. Real estate investment trusts (REITs) serve as an inflation hedge because real estate does well during periods of inflation. REITs are companies that own and often operate income-producing real estate. They can include office and apartment buildings, warehouses, hospitals, shopping centers, hotels and more. REITs can offer an income stream for savvy investors.
Finally, we're left with investing in commodities. Commodity prices, such as natural gas and grains, crude oil and metals, usually rise when inflation goes up, so investing in commodities may help couch your portfolio against inflation.
Why Commodities During Inflationary Periods?
During periods of higher inflation, you can insist on investing in companies in industries that not only have staying power but that can raise prices during inflationary periods.
Evaluate which types of companies are useful during periods of inflation. No matter what happens with the value of the dollar, commodities will still be in demand.
3 Commodity Investments for Right Now
Let's take a look at three types of commodity stocks you may want to consider investing in now.
Freeport-McMoRan Inc. (NYSE: FCX)
Freeport-McMoRan Inc. mines copper, gold and molybdenum through several sectors, including North America copper mines, South America mining, Indonesia mining, molybdenum mines, rod and refining, Atlantic copper smelting and refining and corporate and eliminations.
Freeport's portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world’s largest copper and gold deposits and significant mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde operation in South America.
A few Q4 2021 and year-end highlights from Freeport-McMoRan include the following:
- Net income attributable to common stock in Q4 2021 totaled $1.1 billion, $0.74 per share.
- Average realized prices in Q4 2021 were $4.42 per pound for copper, $1,808 per ounce for gold and $19.42 per pound for molybdenum.
- Operating cash flows totaled $2.3 billion (including $0.4 billion from working capital and other sources) and $7.7 billion (including $0.8 billion from working capital and other sources) for the year 2021.
- Capital expenditures totaled $0.8 billion in Q4 2021 and $2.1 billion. Capital expenditures for the year 2022 are expected to approximate $4.7 billion, including $2 billion for major mining projects.
- At December 31, 2021, consolidated debt totaled $9.5 billion and consolidated cash and cash equivalents totaled $8.1 billion, resulting in net debt of $1.4 billion.
Alcoa Corporation (NYSE: AA)
Alcoa Corp., headquartered in Pittsburgh, Pennsylvania, produces bauxite, alumina and aluminum products. It operates under three segments, including bauxite, alumina and aluminum. The company executes bauxite mining operations, processes bauxite into alumina, smelting and casting operations, smelting operations to produce molten primary aluminum and production of foundry ingot or into value-add ingot products, including billet, rod and slab.
Alcoa Corporation's Q4 results included increased revenue to $3.3 billion, a 7%, $565 million in cash from operations and a cash balance of $1.9 billion, including restricted cash of $110 million
The company at the end of the year posted the highest annual net income of $429 million and earnings per share of $2.26 and generated revenue of $12.2 billion, an increase of 31% from 2020. The company realized a 140% annual increase in adjusted EBITDA and generated net cash proceeds of $966 million from non-core asset sales and advanced progress on five-year portfolio review of operating capacity in the aluminum segment.
Albemarle Corporation (NYSE: ALB)
Albemarle Corp., headquartered in Charlotte, North Carolina, develops, manufactures and markets chemicals for consumer electronics, petroleum refining, utilities, packaging, construction, transportation, pharmaceuticals, crop production, food safety and custom chemistry services. It has three segments: lithium, bromine specialties and catalysts, in which it develops basic lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride and value-added lithium specialties and reagents, products used in fire safety solutions and other specialty chemicals applications, clean fuels technologies, hydroprocessing catalysts and heavy oil upgrading.
This year, Albemarle Corp. experienced:
- Net sales of $894 million, an increase of 2%.
- Net loss of ($3.8) million or ($0.03) per diluted share.
- Adjusted EBITDA of $229 million, an increase of 3%.
This year, Albemarle should build on favorable market conditions for lithium and bromine and its adjusted EBITDA should raise 35% to 55% higher year over year. The Kemerton I conversion plant is mechanically complete and in the commissioning phase and the construction team is now dedicated to Kemerton II.
Check Out Commodities Now
Why not look into commodities during high inflation periods? Commodities tend to be the most positively correlated with inflation, as calculated by the Consumer Price Index (CPI). Commodities like crude oil, natural gas and agricultural commodities rise during these high-inflation time periods.
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