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Amid the global commodities upswing of the last three years, “nothing much” has been happening in the agricultural commodities sector, says Ingo Narat in Handelsblatt. UBS recently examined how far various commodities have to go in inflation-adjusted terms before they reach the peak levels seen at the apex of the last commodities boom 25 years ago. Real energy prices are already 80% there, but coffee, despite recent gains, costs just 15% of its previous peak; sugar only 5%.
So there’s plenty of scope for ‘softs’ to catch up with other raw materials. On the demand side, the key factor is industrialising China. As the 1.3 billion-strong population becomes richer, it will want more and better food. To appreciate the potential for demand for softs to expand, consider coffee: according to Marc Faber, the Germans and the Swiss currently consume 50 times as much coffee per head as the Chinese. Given that there are sixteen times as many Chinese as Germans, a massive jump in coffee consumption is on the cards as China develops a taste for a morning latte. Shorter-term, demand for meat is on the rise since protein intake climbs as people shift up the food chain. The trouble is, however, that urbanisation is reducing the supply of available land for growing crops to feed cattle. Tight water supplies in China also bode ill for greater overall agricultural production. The rest of the world could also have trouble boosting global food supplies significantly in future: a recently released four-year study of the world’s ecosystems by 1,400 scientists highlighted widespread environmental degradation, especially in the developing world. All in all, then, soft commodities look a solid long-term bet.
The easiest way to gain exposure to soft commodities is through spread betting.
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Andrew Van Sickle
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