agricultural commodities and inflation hedge

CFA Level III Portfolio Management
#1

So my understanding is that agricultural commodities are good source to hedge EXPECTED INFLATION, and energy (storable) commodities are good source to hedge UNEXPECTED INFLATION . This is what I have concluded from the EOC and Schwezer readings. now when I tried to solve CFAI mock 2014 they confuses me and I feel lost again. Agricultural are good for expected or unexpected hedge for inflation ? Any help ?

#2

Any thought?

#3

You are correct with respect to unexpected inflation. However I would think that commodities would price in expected inflation and thus are not a good hedge for it.

#4

I found this online: LOS 31 M - Why do some commodities provide a better inflation hedge than others. 2 factors?

The two factors that affect whether commodities are inflation hedges are 1. Storability 2. Their demand in relation to economic activity (if it is linked like energy). Things like gold and energy are inflation hedges. Livestock and agricultural commodities appear to have the opposite behaviour and are negatively affected by inflation.

#5

Still confused…

#6

I would say that this is correct. Energy is a storable commodity which is directly linked to economic activity --> _un_expected inflation hedge (see EOC 25, Reading 25)

#7

Thanks arigolden. Re bolded sentence

does this mean non-storable commodities are negatively correlated to both expected and unexpected inflation?

#8

For the purposes of CFAI, just know this:

If commodity is storeable it is a good inflation hedge (energy)

If the commodity is NON-storable (livestock, agriculture) it is not a good inflation hedge

#9

Be precise: UNEXPECTED inflation hedge

#10
#11

When you say cfa mock 2014- is that the past 2014 AM paper? I dont see any question…