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Commodities

Climate change could reduce supply and spike prices

by Howard Marella

Commodities — such as cocoa, coffee beans and other exotics — rely on a specific climate, and interruptions to these conditions can deeply reduce the yield of these crops. The supply drop can affect the global economy via a rise in prices. Changes to the Earth’s climate will impact crops and livestock across the world through altered growing seasons, changes in weather patterns and more severe droughts and rainfalls. Pollution presents a challenge to commodities as it can have a chain reaction of effects on many different ecosystems across the planet.

The world’s supply of cocoa grows within 20 degrees north and south of the equator. This section of land is the only place on the planet with the right conditions for the plant to thrive. As temperatures rise and climate change begins to settle in, this belt may shrink or disappear altogether, significantly reducing the supply of cocoa and raising its price. However, this threat is not unique to the cocoa plant. Other exotics such as oranges, coffee and cotton all require specific conditions to produce enough supply for its demand. With climate change threatening to change temperatures and rainfall patterns, many exotics may fall victim to the negative effects of pollution.

Wheat is the largest agricultural commodity and has a profound affect on the U.S. and global economy. For example, the drastic economic impact of the Dust Bowl was caused by the destruction of wheat production. Disruptions to the production of wheat can have resonating consequences across the planet, as it is a staple in many diets around the world. Unfortunately, wheat is more susceptible to the impact of global warming than other plants. Experts believe a simple 1-degree increase in global temperatures can reduce the production of wheat by 4 percent to 6 percent.

Environmental agencies are placing limitations on the amount of pollution a business can produce in an allotted period of time. This has inadvertently created a new tradeable asset: renewable energy credits (also known as renewable energy certificates, but not tradeable on a Futures Exchange). Companies will trade these if they predict that they will exceed their allotted pollution credits. As environmental concerns grow across the globe, the sharp gaze of environmental groups settles on the crude and coal industries. This increase in pressure is restricting its production and reducing jobs. This is forcing the adoption of new practices that will create new, emerging markets and economies. While the end of our reliance on fossil fuels may be decades away, the pressures can still negatively impact these commodities.

Pollution brings a cloud of uncertainty to the long-term future of some commodities. While some of its effects will benefit certain commodities, others will see a rapid decline in production. Commodities are deeply affected by pollution and as a result will continue to experience additional volatility from its effects as the variance of their fluctuations may continue to increase as climate conditions change.

Howard Marella is founder and CEO of Icon Alternatives.

This article appears in the April issue of Real Assets Advisers. For more information on this magazine or to sign up for a trial subscription, click here.

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