CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

25.5 FUNDAMENTAL ANALYSIS FOR DIRECTIONAL AND RELATIVE VALUE STRATEGIES

Directional and relative value strategies often depend on fundamental analysis for trade identification. Fundamental analysis in commodity investment involves identifying and predicting changes in supply and demand, including changes in inventory levels and cost of carry. The time frame of analysis depends on the horizon of the investment and the characteristics of the particular commodity in question. While much of the analysis may focus on shorter-term patterns (such as harvest season to harvest season), longer-term trends may also be considered, such as global demand growth due to emerging markets. A fundamental understanding of the commodity in question is essential. A brief description of the characteristics of wheat is provided next.

25.5.1 Fundamental Analysis: Understanding the Characteristics of Wheat

Wheat is a member of the grass family. It is the most prevalent cereal grain and provides more nourishment across the globe than any other food. It is believed to have originated near what is now Iraq, and has been consumed by humans since about 10,000 B.C. Although it was grown by colonists in America in the seventeenth century, wheat remained a relatively small crop in the United States until the late nineteenth century, when a hardy strain known as Turkey red wheat was brought to Kansas by Russian immigrants. Wheat is classified by growing season and further segmented by class. It is grown in two distinct ...