We all know about rising world food prices, from shortages causing riots in Africa to our own hip pockets at the supermarket, but investors have had limited opportunities to get into agriculture. Options are finally increasing for the soft commodities that many experts consider the coming hot sector. Investors can trade through futures, warrants and options and a limited number of listed stocks. There are also managed funds available, although you have to search around for them.
The Australian Stock Exchange offers futures and options in food commodities including wheat, barley and cattle but firms involved in commodity derivatives also deal on foreign exchanges which offer more products and deeper markets.
One of the lures of soft commodities has been their rising prices, although many are well off their year highs. Peter McGuire, managing director of Commodity Warrants Australia (CWA), says commodities usually trade counter-cyclical to equity markets and investors are being drawn to the markets by the returns. For example, wheat was at $US4.50 a bushel two years ago, hit a high of US$13 since and is now trading around US$8. McGuire says clients have seen commodity prices rising against falling or lacklustre equities, warnings of food scarcity hitting the front pages and analysts such US investment guru Jim Rogers saying that commodities will continue to boom.
CWA trades warrants on markets such as the Chicago Board of Trade and McGuire says the current favorite contracts are gold, oil, corn, soy beans and wheat. He says investors like them because the downside is limited.
“They are not like a CFD or futures, you know exactly what your risk is from day one.”
McGuire says the popular contracts are for 60 to 80 days and most clients start investing with $5,000 to $25,000.
Food commodities trade in a similar manner to oil, being affected by the weather, seasonality, reports of disruption to production and other supply/demand issues. Some of the risks include currency moves, weather and intervention by governments. The markets can be very volatile.
McGuire says investors can get information easily. CWA provides fundamental and technical analysis, recommendations and daily reports and he says there are many other sources for investors.
Commodity Broking Services managing director Jonathan Barratt says the soft commodity markets are some of the biggest and deepest markets in the world and investors can get access by buying a $2000 option.
“It is a very clean and transparent market, everyone knows who the players are. What news is out there, everybody knows.”
Barratt says some investors like the seasonality of the markets, because they know which way prices will move at certain times, such as at harvest. He says that although there were spikes a few months ago, wheat and other food commodities are back to their prices of a year ago. However, he says that demand for the products will remain and that what happens in commodities flows through to equities and other markets.
The Australian Stock Exchange lists some equities related to agriculture, including Australian Agricultural Co, Incitec Pivot (reviewed by Tim Lincoln on Aug 7), Nufarm and the grain handlers AWB and ABB Grain plus the agricultural investment companies such as Timbercorp and Great Southern Ltd.
Great Southern diversified into funds management last year and its Rural Opportunities Fund made a gross total return of 2.4% in the year to June 30. The Fund offers a basket of investments, including vineyards, poultry, sugar, floriculture, land and water entitlements. The minimum initial investment is $10,000. Great Southern spokesman David Ikin says it is a product that suits income investors and the company recommends they see it as a minimum three to five year investment.
Ikin says interest is being driven by the boom in soft commodity prices and growing middle classes in Asia looking to Australia for clean, disease-free food. “We believe we are on the cusp of a very strong period in Australian agriculture and the challenge for a lot of people has been how to capitalize on it.”
Funds offer the advantage of diversity, but many of them are only open to the professionals. Macquarie has two wholesale rural-based funds and although there has been talk of a retail offering, there is nothing on the horizon.
George Lucas, managing director of asset manager Instreet says there are few pure soft commodity funds around and even the equities listed globally tend to be seed, machinery and fertilizer companies. He says most commodity funds contain the energy and mined commodities as well as food.
Instreet plans to shortly offer the retail market an open-ended international commodity fund run by Schroders UK which invests in mineral, energy and soft commodities.
Lucas believes that commodities will be the coming trend in fund management and offerings will increase as interest grows.