'Fantastic opportunities' in agriculture
Oct 30, 2009
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The prices of agricultural commodities, like those of all raw materials, are driven by demand and supply, says Garry White in The Daily Telegraph. "The big problem for your weekly shopping budget in the future" is that both sides of the equation point to permanently higher prices.
The global population is set to grow by 35% to around 9.1 billion by 2050, as Standard Chartered points out in a recent report, and almost all this growth will be in developing countries.
As people get richer, they eat more protein, which will further bolster demand for grains to use as feed for livestock. The upshot is that food production will have to increase by 70% by 2050.
Demand up, supply down
But that won't be easy. The growth in crop yields is slowing. Meanwhile, governments' insistence that more land be set aside for biofuels will increase competition for arable land.
Then there's water scarcity – agriculture already consumes 70% of the world's fresh water – which may be exacerbated by climate change. Half of China's cities face water deficits, says Dylan Grice of Société Générale. Indeed, Asia as a whole will become more reliant on imported food.
The upshot, says Standard Chartered, is that feeding the world is possible, but "at a cost that will inevitably mean" higher prices. This is "the end of cheap food".
The compelling long-term bullish case for agricultural commodities remains intact, agrees Deutsche Bank. But it has been "temporarily" overshadowed by the financial crisis, which weakened demand, and record harvests in some countries. Wheat, corn and soybeans have lagged the rest of the agricultural complex amid strong harvests in America, the top exporter of these commodities.
Overall, however, demand for softs has not been affected by the crisis as much as for other commodities, says Kona Haque of Macquarie. And soaring prices in other markets this year are a reminder that "even with a relatively small drop in supply, prices can react violently to the upside". A sliding dollar and rising risk appetites have also boosted commodities.
Sugar and cocoa have soared...
Enter sugar, which has more than doubled this year to a 28-year high of 25 cents per pound amid poor crops in Brazil and India, the world's top producers, says Javier Blas in the FT.
Stocks are at their lowest since 1973. Jonathan Drake of Cargill, who said early this year that prices could spike, thinks "current prices have not done the job of curtailing demand enough". US trading house Bunge reckons sugar could hit 27 cents to 29 cents in early 2010.
... and cotton is set to follow
Then there's cocoa – at a 29-year high of $3,387 a tonne. Strong sales at Cadbury last week pointed to solid demand despite the crisis. And yield-limiting ailments have lowered supplies from trees in key producers Ivory Coast and Indonesia.
So the market appears to be heading for a supply deficit for a fourth successive year – this has not occurred since the 1960s. Ongoing supply-side problems and a boost in demand as suppliers restock provide a "positive backdrop" to prices, says Barclays Capital.
Eugen Weinberg of Commerzbank notes that unusually heavy rain has severely hampered the US cotton harvest. By the end of next year, says Weinberg, cotton could be at 75 cents per pound, up from 67 cents now.
Whatever happens to these volatile assets in the short term, the next 20 years should offer "fantastic opportunities", says White. There are ETFs tracking a basket of grains (AGGP), cotton (COTN) and sugar (SUGA), while investors can spread-bet on cocoa futures at Finspreads.com. and Igindex.co.uk.
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