By David Campbell
Investing in soft commodities is a fundamentally different proposition from other alternative asset classes, let alone traditional securities. Sharp gains in the price of Zinc are rarely, if ever, the cause of full-page advertising spreads and billboards calling for unspecified intervention to curb speculation.
Charities and policy-makers, from Oxfam and Christian Aid to the World Bank, have all voiced their concern about resurgent food prices in recent weeks. Their alarm has very real cause; large swathes of the world’s population routinely spend around 70% of household income on their food budget, and few governments are willing to tolerate a repeat of the global food riots of 2008.
The need to keep oil revenues high to pay for subsidised staples was the major cause of the fallout at last week’s Opec meeting, as a series of emerging states defied the dovish stance of Saudi Arabia.
Cereal prices have gained 69% over the past year and global Wheat prices have more than doubled. But there are reasons to believe that much of the impetus behind these gains is already fading.
Robert Farago, head of asset allocation at Schroders, said the marginal sensitivity to pricing and demand contained a time lag, but tended to correct on the supply side sooner rather than later.
‘The drivers for soft commodity prices are cyclical rather than structural,’ he said. ‘There has been a lack of investment in agricultural production, leading to bottlenecks and spikes in food prices.
‘However, because there isn’t a shortage of agricultural land, higher prices will eventually Lead to higher production, which in turn will drive prices down again. We do expect soft commodity prices to rise in the short term, but they are volatile and some prices are frothy. There are safer bets out there.’
The weight of capital suggests any correction could also be sharp. Relatively few are betting on any downside in grain prices, with short activity almost non-existent, according to Data Explorers.
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