Investing in growing assets

The doubling of the world’s population in the past 40 years has increased global demand for commodities, resulting in many soft commodities being in short supply.

However, demand has zigzagged over the past five years in response to macroeconomic conditions, with a crash in late 2008 and early 2009 followed by a surge towards the high food prices that helped trigger the Arab Spring, which began in late 2010.

Bill Mott, manager of the PSigma Income fund, whose investments are managed from a macroeconomic perspective, says: “As soon as growth picks up, commodities fly. [This is] in turn sowing the seed for the next slowdown because demand is severely dampened, until prices fall back and we go round again. This will leave us facing a wave of mini cycles or a corrugated economic profile. In this way, we see commodity markets acting as a global central bank, smoothing out the peaks and troughs before they get too large in either direction.”

Commodity investment vehicles experienced £1.5bn in outflows in the first three months of 2012, according to Morningstar, but soft commodities in particular have seen a bounce in recent weeks. This, according to market analysts, is a sign of a global recovery starting to seep through, led by a stabilisation of the crisis-hit developed world. As further evidence, market watchers have pointed to successful bond auctions in troubled eurozone nation Spain and a string of solid US corporate earnings.

The price of barley, rice, wheat, soya beans and cocoa beans was up for the month of April, according to data portal IndexMundi. Soya beans gained the most, undergoing a 7.53 per cent increase in value for the month. Over the year to date they are also up 12.35 per cent. However, soft commodities in general are down by more than 5 per cent for the year, according to S&P Indices. Cotton appears to have seen the greatest decline in value over the past 12 months, with its value down by 56.66 per cent. This is because the cotton market faces two huge uncertainties in the short term: first, how to deal with the hangover left after the high cotton prices of 2010-11 contracted global demand and, second, uncertainty over how China will treat cotton in its programme to stockpile strategic commodity reserves.

Wheat has also suffered, with prices down more than 8 per cent in the past 12 months. The Standard & Poor’s commodity report states: “Higher protein content hard red winter wheat is deliverable into Kansas wheat futures and has suffered more in 2012, notably due to favourable spring weather.” According to the report, the past few years of wheat price history demonstrate how the supply and demand cycles of some agriculture commodities can be rebalanced in a single annual cycle. “The US is the world’s largest grain exporter and the favourable early spring weather has also allowed farmers to plant more corn earlier in the season. Farmers are delighted at the prospect of an ample and early potential harvest of the winter wheat crop, which can be double-cropped with soya beans,” the report claims.