GLOBAL MARKETS

Soft commodities in strong demand as food prices soar

DALE JACKSON
Dale Jackson is a producer at Business News Network.
April 15, 2008

Traders in soft commodities are keeping a close eye on events in parts of the developing world where food supply shortages and skyrocketing prices have sparked riots.

The World Bank says 33 nations may face "social unrest" as a result. Already in Haiti four people died in two days of rioting. In some countries, hording is punishable by jail terms or even death.

Prices for crops such as wheat and rice - a basic staple for half the world - have doubled over the past year. According to the United Nations' Food and Agriculture Organization global food prices rose 57 per cent in March from the previous year.

The supply crunch is prompting exporting nations like China, Vietnam, India and Egypt to hold back supply - forcing consuming nations like the Philippines to ration whatever is available on the open market.

"That situation could, in the short term get even worse. I don't see any immediate solution for that over the next several weeks or months," says Vic Lespinasse, a soft commodities trader at the Chicago Mercantile Exchange.

The analyst at Grainanalyst.com says farmers around the globe have responded with aggressive planting programs and prices could moderate in the longer-term.

However, he's careful to point out that in the agriculture sector everything depends on the weather.

"If we have normal weather I think we will see much bigger crops this year and 12 months from now prices will be lower than they are currently," he said. "If the weather is not favourable -which is always a possibility - you ain't seen nothing yet."

Weather is a bigger price factor than other supply-draining fundamentals such as global population growth, demand from China, the weak U.S. dollar and growing demand for biofuel, he added. Global warming has made weather patterns harder to predict. A recent report by Macquarie Research Equities points specifically to the La Nina weather system for global weather shifts.

According to the report, excess rain in Southeast Asia will reduce palm oil output, more rain in Australia will increase wheat output, and a strong hurricane season in the Americas could damage sugar, cotton and other crops.

Another disrupting factor cited in the report is frequent crop-switching by farmers attempting to adjust to market demand and shifting government policies.

Although Mr. Lespinasse says he doesn't expect prices to ever return to pre-rally levels he is advising his clients that soft commodities - those that are grown, rather than mined - could be nearing peak territory.

Chuck Bastyr, chief investment officer with Meadowbank Asset Management, has been a buyer of soft commodities for over a year and says he will continue to be a buyer for the foreseeable future. Urbanization and the loss of arable farmland will always keep some soft commodities in demand, he said.

"You tend to grow what gives you the highest yield," he said. "If corn and wheat and soybeans are strong, people aren't going to plant cotton. Then you'll have a shortage of cotton, and for the next planting season cotton will be the 'in' commodity."

The "in" commodities right now are palm oil and soybeans, Mr. Bastyr said, adding that he's also investing in sectors related to agriculture. "There's a whole food chain including farm equipment, feeds, chemicals, fertilizers or the commodities themselves."

His holdings include Malaysian and Indonesian palm oil producers and a U.K.-based company called Plant Health Care PLC (PHC/London) that claims to have produced a natural bacteria that can increase root size up to 3,000 per cent. The larger root size allows farmers to produce more crops on existing land. "They're showing yield improvements of about 10 to 30 per cent on most crops," he says.

One sell signal Mr. Bastyr is looking for is an accelerated run-up in prices, which he feels could lead to a collapse in demand.

Governments tend to take an active role in the soft commodities market through regulations and subsidies, and he says that poses another investment risk if policies fail or suddenly change.

Mr. Bastyr invests in soft commodities individually or in baskets through exchange traded funds that trade on the London Stock Exchange.

There is a wide assortment of soft commodity ETFs that trade in North America as well. Deutsche Bank sponsors the PowerShares DB Agriculture ETF, which trades on the AMEX under the symbol DBA. The Elements International Commodity Agriculture index fund - founded by Jim Rogers - trades on the AMEX under RJA. Another AMEX ETF under the symbol MOO is the Market Vectors-Agribusiness ETF.

Soft commodity funds that trade in Canada include the Claymore Global Agriculture ETF (COW-TSX) and Horizons BetaPro Agriculture Bull Plus Fund (HAU-TSX).