CFA Level I Exam · Natural Resources

Natural Resources Overview and Investment Drivers

Updated 7 October 2026 · Fact-checked

Natural resources are real assets such as commodities, timberland and farmland whose value comes from physical supply and demand. You solve questions by identifying the category, the main supply and demand drivers, the return source (price change, income, biological growth) and the portfolio role: diversification and inflation sensitivity.

Understand Natural Resources Overview and Investment Drivers

Natural resources are physical assets taken from or grown on the earth. Think of oil, copper, wheat, timber and farmland. They sit inside real assets, which also include real estate and infrastructure. At Level I they are treated as an alternative investment.

There are two broad groups. Commodities are standardized raw materials such as energy, metals, and agricultural goods. They are usually traded as spot or derivative contracts. Land-based assets are timberland and farmland. They are owned directly or through funds, and they produce a cash flow, not just a price.

Prices are driven by supply and demand. Demand follows global economic growth, industrial activity, population and income. Supply depends on production capacity, weather, discoveries, technology, storage and politics. Supply is often slow to respond. A mine or an orchard takes years to expand. So prices can swing sharply when demand shifts.

The portfolio case rests on three points. First, returns often have low correlation with stocks and bonds, so they may diversify. Second, many natural resource prices tend to rise with unexpected inflation, so they may act as an inflation hedge. Do not treat this as a guarantee. Third, timberland and farmland can produce income and biological growth, which gives returns beyond price changes.

The costs are also testable. Returns can be volatile. Physical assets are illiquid and hard to value. Storage and transport matter for commodities. Weather, disease, regulation and environmental or ESG issues can hurt value. Many exposures use futures, so roll yield and collateral return affect results.

Key formulas to remember

Land-based asset return: Total return ≈ income yield + biological growth + change in land or asset price; Mainly for timberland and farmland. Income comes from harvest or crop sales and lease payments.
Commodity futures return: Total return = spot price return + roll yield + collateral return; Roll yield is positive when futures are in backwardation and negative in contango. It is a different topic page, but you need the link.
Real return (approximate): Real return ≈ nominal return − inflation rate; Use it to judge an inflation hedge claim.

How to solve Natural Resources Overview and Investment Drivers questions

Use the same sequence for any natural resources question, whether it asks about drivers, returns or portfolio role.

1Identify the category: commodity (energy, metals, agriculture), timberland or farmland.
2Decide if the question is about supply, demand or both. Note any shock named in the stem, such as drought, new mine or slowing growth.
3Predict the direction of price or return from the shock before looking at the options.
4Identify the return source: price change only, or also income, biological growth, roll yield.
5If it asks about portfolio role, think diversification, inflation sensitivity, volatility and illiquidity.
6Eliminate the two wrong options: reject any option that contradicts your predicted direction or claims a guaranteed hedge or no risk.
7Pick the remaining option and check wording such as 'most likely'.

Quickest way: Shock, direction, source

When to use it: For short conceptual questions with about 90 seconds available.

Underline the shock and the asset in the stem.
Supply down or demand up means price up. Supply up or demand down means price down.
Land assets add income and growth, so their returns are not price only.
Cross out options with words like always, guaranteed or eliminates risk.

Common mistakes in Natural Resources Overview and Investment Drivers

Treating natural resources as a guaranteed inflation hedge.
Notes often say they hedge inflation, and students drop the word 'tend'.
Fix: Say they may offer inflation protection, but returns are volatile and the link is not constant.
Confusing commodities with timberland and farmland.
All are called natural resources.
Fix: Commodities are traded raw materials with no cash flow of their own. Timberland and farmland are land assets that generate income and growth.
Ignoring the slow supply response.
Students assume supply adjusts quickly to price.
Fix: Remember that mines, wells and tree crops take years to expand, so price shocks can persist.
Assuming diversification means no risk.
Low correlation is read as safety.
Fix: Diversification lowers portfolio risk but the asset itself can be very volatile and illiquid.
Counting only price change as return.
Commodity thinking is carried over to land assets.
Fix: For timberland and farmland add income and biological growth. For futures add roll and collateral return.

Worked examples

Example 1

A severe drought reduces global wheat harvests while demand stays stable. Which is the most likely effect on wheat prices and on a farmland investor's returns? A) Wheat prices fall and farmland returns rise. B) Wheat prices rise and farmland returns are uncertain because higher prices are offset by lower yields. C) Wheat prices are unchanged because demand is stable.

Show the solution

Identify the shock: supply falls, demand unchanged.
Supply down with stable demand pushes the price up, so A and C are wrong.
A farmland investor gets higher prices per unit but sells fewer units because the drought cuts yields. The two effects offset, so the net effect on returns is uncertain.
Option B states both the price direction and the offsetting effects.

Answer: B

Example 2

A timberland fund earns an income yield of 3%, biological growth of 5% and a land value change of −1% in a year. What is its total return? A) 7% B) 8% C) 9%

Show the solution

Total return ≈ income yield + biological growth + land value change.
3% + 5% + (−1%) = 7%.
Options B and C ignore the negative land value change or add it instead of subtracting it: 8% comes from dropping the −1% (3% + 5%), and 9% comes from adding 1% (3% + 5% + 1%).

Answer: A

Exam tips

Expect conceptual three-option questions on drivers and portfolio role more than long calculations.
Watch absolute words such as always and guaranteed. They usually mark the wrong option.
Read the stem to see whether it concerns commodities or land assets, since return sources differ.
When a shock is given, predict the price direction first, then check the options.
Link this topic with commodity futures returns and the alternative investments chapter, as both can appear together.

Practice questions from Natural Resources

Natural Resources Overview and Investment Drivers: frequently asked questions

Are natural resources a good inflation hedge?

They tend to benefit when inflation is driven by rising commodity prices, so they may help protect purchasing power. The relationship is not constant and the assets are volatile. Treat it as a possible benefit, not a guarantee.

What are the main categories of natural resources for the CFA Level I exam?

The main groups are commodities (energy, metals, agriculture) and land-based assets such as timberland and farmland. They are real assets and part of alternative investments.

What drives natural resource prices?

Demand comes from economic growth, industrial use and population. Supply depends on capacity, weather, technology, storage and politics. Because supply responds slowly, prices can move sharply.

How do timberland and farmland differ from commodity futures?

Timberland and farmland are owned land assets that produce income and biological growth. Commodity futures give price exposure and their return includes roll yield and collateral return.