Four funds offering tasty returns from soft commodities
“They have been blamed for putting up the price of everything from bicycles to garden fences,” writes Kate Connolly in The Guardian. “Now the Chinese have been dubbed ‘milk snatchers’ by German consumers” for buying so much milk that prices of dairy products in Germany are soaring: a third of milk worldwide now finds its way to China.
But milk isn’t the only thing bumping up the cost of a supermarket shop in the West. Prices for soft commodities are rising across the board. This is partly down to a supply crunch as land once dedicated to food production is being turned over to biofuel production. But as the Germans are finding to their cost, it is also a result not only of a rising world population, but also of changes in that population’s eating habits. “As incomes rise, people’s propensity to eat meat increases – it takes 4 kg of grain to raise 1 kg of chicken,” says Peter Bickley, chief economist at Tilney Asset Management in What Investment. Chinese meat consumption has risen 50% in the past 15 years and is likely to keep rising: it is still 25% below the developed market average.
Yet just as demand is rising, in a story familiar to those who have been investing in the hard commodity market over the last few years, supply is being crunched. “China, for example, has lost 9% of its arable land over the past few years to industrial use, while biofuel crops are competing for land. All of a sudden, there appears to be an agricultural shortfall”, says Mark Dampier of Hargreaves Lansdown in The Daily Telegraph.
You can track this trend via exchange traded funds such as the ETFS Corn (LSE:CORN) or ETFS Grains (LSE:AIGG), which follows the price of a basket of grains. Alternatively, if you want greater diversification, you could buy the ETFS Agricultural (LSE:AIGA), which tracks the Dow Jones Agricultural Index. You might also consider the Eclectica Agricultural Fund, the only UK-regulated fund playing the theme. “Inventories are low, supply growth has stagnated and demand is rising. We sense an opportunity. We have seen oil go from $10 to $80 and copper from 60 cents to $4 an ounce.” This is a market where “we are looking at making eight times your money,” Eclectica’s Hugh Hendry tells The Sunday Telegraph. Where possible, the fund is to be invested in listed companies owning farmland, but it will also take in the firms providing the machinery that will allow farmers to increase their productivity. Hendry points in particular to tractor company Case New Holland and Europe’s leading plough manufacturer, Kverneland.
