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CFA Level I · CFA Level I Exam

Natural Resources for CFA Level I: Chapter Guide

Natural Resources covers commodities, timberland and farmland as investments. You learn how commodity spot and futures markets work, how futures returns split into spot, roll and collateral components, and what drives real asset returns. Solve questions by naming the return component, checking the curve shape, and ruling out two options.

What this chapter covers

This chapter sits in the Alternative Investments topic. It looks at real assets whose value comes from physical resources: commodities such as energy, metals and grains, and land-based assets such as timberland and farmland. The chapter asks why investors hold them, how they are priced and traded, and what can go wrong.

The core technical idea is commodity futures returns. Most investors do not hold barrels of oil. They hold futures. So you must see why a futures return is not the same as the change in the spot price. It is built from the spot price change, the roll return and the collateral return. The shape of the futures curve, backwardation or contango, drives the sign of the roll return.

The chapter links to other parts of the paper. Futures pricing and the cost of carry connect to Derivatives. Inflation and supply and demand connect to Economics. Diversification, correlation and risk-return trade-offs connect to Portfolio Construction. Valuation of land assets connects to income and cash flow ideas from Corporate Finance and Equities.

Alternative Investments carries a topic weight of 6-9% in the 2027 curriculum, and this chapter is a compact, rule-based part of it. The ideas are limited in number and are tested with short conceptual questions and simple calculations. That makes it good value for the effort. Since every question is worth the same and there is no penalty for wrong answers, you should answer all of them. A candidate who knows the return components and the curve shapes can pick up several reliable marks. The chapter also reinforces futures logic that helps in Derivatives.

Natural Resources: topics in the order to study them

  1. 1Natural Resources Overview and Investment DriversStart with the big picture: what counts as a natural resource and why investors hold it, so later details have a frame.
  2. 2Commodities: Types, Spot and Futures MarketsYou need the vocabulary of commodity groups, spot trades, forwards and futures before you can read return formulas.
  3. 3Commodity Futures Returns: Roll, Collateral and Spot YieldThis is the most technical part and depends on the futures market basics, so study it once the markets are clear.
  4. 4Timberland and Farmland InvestmentsThese land-based assets use a different logic of biological growth, land value and income, so learn them after commodities.
  5. 5Ways to Invest and Risks in Natural ResourcesEnd with access routes and risks, which pull together everything above and suit scenario questions.

How to prepare Natural Resources

Aim to understand the logic first, then drill short questions. The chapter is small, so you can finish it in a few focused sessions, even on a phone.

  1. Read the overview and write one line on why each asset type (commodities, timberland, farmland) is held: diversification, inflation protection, or income.
  2. List the commodity sectors and give one example of each. Note what makes each one different, such as storability or seasonality.
  3. Draw the futures curve twice, one in backwardation and one in contango. Mark which way the roll return goes in each case.
  4. Write the futures return as spot return + roll return + collateral return. Practise labelling each piece from a short data set.
  5. Compare timberland and farmland side by side: sources of return, such as biological growth, price changes and income, and what drives each.
  6. List the ways to invest (direct, funds, listed companies, futures) and the main risks for each. Link each risk to an example.
  7. Finish with timed practice at about 90 seconds per question. For each miss, write the trap that caught you.

Common mistakes in Natural Resources

  • Treating the futures return as equal to the spot price change.

    Fix: Always split the return into spot, roll and collateral parts. Check which parts the question gives you.

  • Mixing up backwardation and contango, and so getting the roll return sign wrong.

    Fix: Remember the rule: futures below spot is backwardation and usually a positive roll; futures above spot is contango and usually a negative roll. Sketch the curve before answering.

  • Assuming all commodities behave alike.

    Fix: Separate sectors by storability, seasonality and demand. Energy, metals and agriculture respond to different forces.

  • Treating timberland and farmland as the same.

    Fix: Tie each to its own drivers. Timberland has biological growth and flexible harvest timing; farmland depends on crop cycles or rental income.

  • Ignoring illiquidity and valuation risk in direct land holdings.

    Fix: For every way to invest, name the access route, its liquidity and its main risk before you choose an option.

  • Leaving questions blank when unsure.

    Fix: There is no penalty for wrong answers. Eliminate the option that breaks a rule, then pick between the other two.

Last-day revision: Natural Resources

  • Natural resources are real assets: commodities, timberland and farmland.
  • Investors use them for diversification, inflation sensitivity and return potential.
  • Spot trades settle for immediate delivery; futures fix a price for later delivery.
  • Commodity futures return = spot return + roll return + collateral return.
  • Backwardation: futures price below spot, so the roll return tends to be positive.
  • Contango: futures price above spot, so the roll return tends to be negative.
  • Collateral return is the interest earned on the cash that backs the futures position.
  • Most futures investors close or roll positions before delivery.
  • Timberland returns come from tree growth, timber price changes and land value.
  • Farmland returns come from crop income or rent and land value changes.
  • Direct land ownership is illiquid and needs specialist management.
  • Prices of commodities are driven by supply, demand, weather and global events.

Natural Resources practice questions

Natural Resources in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Natural Resources: frequently asked questions

Which topic area does Natural Resources belong to?

It is part of Alternative Investments. In the 2027 curriculum that topic has a weight of 6-9% of the Level I exam.

Do I need a calculator for this chapter?

Only for simple return calculations, such as adding the spot, roll and collateral returns. The TI BA II Plus or HP 12C is enough, and many questions need only basic arithmetic.

What is the most testable idea in Natural Resources?

The breakdown of commodity futures returns and how backwardation or contango affects the roll return. Know it well, because it can appear as both a concept and a calculation.

How long should I spend on this chapter?

It is shorter than many other chapters, so a few focused sessions plus practice questions can be enough. Spend the most time on futures returns, then revisit the land assets and risks.