Tuesday, Oct. 22 2013, 8:16 PM EDT
TIM SHUFELT - INVESTMENT
prices for soft commodities could signal buying opportunity
bust of agricultural commodities over the past couple
of years has brought down the cost of betting on the
world’s growing need for food and clothing.
Since the recession, the so-called soft
commodities have been influenced by much more than supply
and demand. Fuelled by speculative trading, prices of
food and cotton hit extremes, peaking in 2011 before
dropping off almost across the board.
But fundamentally, not all that much
has changed the outlook for commodities like coffee,
cocoa, sugar and cotton.
“We’re looking at a pretty interesting
environment for making initial long-term bets on soft
commodities,” said Shawn Hackett, president of Hackett
Financial Advisors in Boynton Beach, Fla.
Investment support for soft commodities
relied on two popular expectations. The first is that
unprecedented monetary stimulus would result in inflation.
Commodities both hard and soft became popular as inflation
hedges as a result.
But those inflationary pressures never
came to be, shaking the first “pillar” supporting soft
commodities, Mr. Hackett said. “The second pillar is
the idea that Asia, specifically China, is going to
continue to grow and consume everything in sight.”
That pillar, too, has weakened, as emerging
market economies have stumbled.
Soft commodities plunged as a result.
Futures contracts for coffee recently hit a four-year
low, down 60 per cent since the April, 2011, peak. Sugar
futures are down 20 per cent off of last year’s high.
Cotton has also dropped by 20 per cent.
“We might have just reverted to the
mean,” said Ron Lawson, a partner at commodity investment
firm LOGIC Advisors. “And in fact, we’re still probably
above the mean.” Such was the extent of the price run.
The fundamentals were in place for a
more modest rally, Mr. Lawson said. But investors fleeing
inflation and hunting for returns amplified the trend.
“That was driven by vast amounts of
liquidity with no place to be invested. Everybody was
looking for something to put their money into,” he said.
“There’s never been this kind of money flow into commodities.”
Prices soared, triggering a second overreaction.
“A lot of producers were hoping to see
the growth we had in 2008 to 2010, and they planted
crops with those expectations,” said Timothy Evans,
chief market strategist at Long Leaf Trading Group.
The resulting supply glut in many of
those commodities finally put a cap on the rally and
sparked the correction now playing out.
While the rise and fall in soft commodities
may have been exaggerated, support remains for a long-term
run. In the United States, quantitative easing continues
apace at $85-billion (U.S.) a month, which could eventually
bring out the long-anticipated inflationary pressures.
And the food requirements of the emerging world are
“China’s having an increasingly difficult
time feeding itself,” Mr. Lawson said. The rise of the
Chinese middle class, with an ever-growing appetite
for Western food habits, should prove a solid foundation
for agricultural commodities.
The correction may yet have room to
slide, but investors might see long-term value in soft
commodities at current prices. “If one’s not a trader,
but has a longer-term view, this is an interesting place
to start taking some stabs on weakness,” Mr. Hackett
Coffee is his top pick in the sector.
“The surpluses in the upcoming crop cycle are well priced
in and that will be the last of it. And demand for coffee
is growing like crazy.”
That growth could become explosive if
China truly becomes a coffee-drinking country.
There are ETFs available for each individual
commodity, or investors can bet on a bundle of soft
commodities through the iPath Dow Jones-UBS Agriculture
Sub-Index Total Return ETN.
those who put money into the area should be aware of
the perils of soft commodities, which are more thinly
traded and volatile than metals or energy commodities.
Plus, one must account for the effect of speculative
traders, Mr. Lawson said. “The effects, especially to
the upside, are going to be magnified.”