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The rally in commodity prices amid fears of a global supply crunch has turned a number of producers into red-hot investments this year, rewarding early bets on the sector. But latecomers might wonder how long the euphoria will last.

One solution: Look at stocks that stand to benefit indirectly from the rally, but have not yet reached the boiling point.

In other words, ignore wheat and focus on railways. Tune out the forecasts for crude oil prices and embrace pipelines. Or accept rising natural gas prices as a good reason to invest in renewable energy.

This might not be an easy pivot, given how compelling the commodities space looks right now. Russia’s invasion of Ukraine, and severe global sanctions against Russian exports, have sent commodity prices soaring.

The Bloomberg Commodities Index, which tracks futures prices for crude oil, natural gas, corn, soybeans, copper, nickel, gold, cotton, to name several, has risen 38 per cent so far in 2022 – even as the S&P 500 has declined nearly 13 per cent over the same period.

The close: Nasdaq confirms bear market as commodities surge and inflation concerns mount

Little wonder, then, that commodity producers are sailing through the current bout of equity market volatility. The energy sector within the S&P/TSX Composite Index is up 36 per cent this year, and the materials sector is up 19 per cent – handily outperforming anything that is not commodities-related.

Analysts are now raising their estimates for commodity prices, bolstering the case for fatter profits and even higher share prices among commodity producers.

But there’s a case for caution here: Commodity prices are inherently volatile, making them less attractive when they are carving out alarming headlines.

High prices can lead to so-called demand destruction. Businesses and consumers conserve on energy and materials when they are unaffordable. Likewise, high commodity prices can depress economic activity, hitting demand.

According to Bank of America BAC-N, crude oil priced above US$100 a barrel for a sustained period lowers economic growth in the year ahead by 1 per cent. West Texas Intermediate crude, a North American benchmark, traded at US$123.70 on Tuesday.

And finally, if war and sanctions are underpinning the current rally in commodities, peace and the resumption of trade could have the opposite effect.

There are several ways to approach commodities if you are worried about the downside risk.

The simplest: Stay diversified with a bet tied to the S&P/TSX 60 Index. This is a collection of the 60 biggest companies in Canada, and it currently has a substantial 29-per-cent weighting in energy and materials stocks. If the rally gains strength, you should do okay. And if it falters, other sectors may cushion the downturn.

Another approach: Invest in stocks or funds associated with renewable energy, as high commodity prices push countries to invest in alternatives to oil and gas.

“I think we are going to see a structural change in the global energy mix as a result of this,” Caroline Bain, chief commodities economist at Capital Economics, said in a conference call on Tuesday.

Though renewable energy stocks have struggled over the past year, they now appear to be regaining favour among investors: The iShares Global Clean Energy ETF, a basket of stocks connected to wind, solar and hydro power, is up 10 per cent this week.

If you want an investment that has a closer connection to traditional energy, pipelines are an attractive option. These stocks tend to perform particularly well when demand for energy is strong and oil prices are high. However, long-term contracts and big dividends provide support when prices are weak.

TC Energy Corp. TRP-T, which operates natural gas and oil pipelines, is up 23 per cent this year. Even so, the stock’s dividend yield is above 5 per cent.

For exposure to a wider group of commodities, consider railways that haul everything from coal to grain to fertilizer to lumber – all of which are soaring.

William Ackman, who runs Pershing Square Capital Management, a U.S. hedge fund, disclosed this week that he had purchased 2.8 million shares of Canadian Pacific Railway Ltd. CP-T, as of Dec. 31. Mr. Ackman’s move toward CP began well before the current spike in commodity prices, suggesting that his interest is longer-term.

Rising commodity prices, though, are making the stock look particularly attractive right now.

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