Snapshot: Risky area that can result in big rewards

Commodities fell out of favour dramatically in 2013 across the spectrum of precious metals, oil, gas and soft commodities within agriculture.

As we near the end of the first quarter of this year, the tide has not yet turned for the precious metals and energy assets. Gold is still hovering near the $1,300 an ounce mark, while Brent Crude oil remains below its most recent peak in August 2013 of $117.34 a barrel at roughly $107 a barrel.

Across the softer commodity spectrum in the agriculture sector, there does appear to be light at the end of the tunnel. In 2013 almost all soft commodities delivered a negative return. The Dow Jones-UBS Agriculture sub-index demonstrated the plight of an investment class primarily dependent on nature as it recorded a loss of 15.87 per cent last year.

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Within this sector, the soft commodities and agricultural options for investment include cocoa, soyabean, cotton, sugar, wheat, corn and coffee, while the meat side of the sector includes hogs and live cattle.

Of these nine agricultural investment indices just three produced a positive return last year, with the Dow Jones-UBS Cocoa Sub Index topping the rankings with a positive return of 15.93 per cent. Soyabean also produced a positive return of 8.48 per cent, with cotton slightly behind at 7.02 per cent.

At the other end of the scale, the worst performer in 2013 was coffee, with a loss of 44.15 per cent, followed by corn and wheat. In a reversal of fortune, the droughts of 2012 that had increased prices as demand outstripped supply in the grains sector were then followed by a bountiful harvest in the US and Russia, which has refilled grain reserves and lowered prices.

But in 2014 the picture across the soft commodities space looks more prosperous, with all nine sub-indices delivering a positive return for the year to date to March 12, while the overall Dow Jones-UBS Agriculture sub-index has returned 15.34 per cent.

The best-performing commodity is coffee, with the Dow Jones-UBS Coffee sub index delivering a massive improvement on last year with a return of 82.15 per cent, according to FE Analytics.

In a recent weekly commodity report, ETF Securities notes coffee prices reached a two-year high in early March on concerns that a drought in Brazil will reduce the crop. The country is the world’s largest producer of coffee, accounting for approximately 35 per cent of production at the end of 2013.

ETF Securities highlights that Brazil’s southeast region is seeing the driest summer since 1972, but it warns: “Given the extremely sharp price rise in such a short space of time and net longs in the futures markets looking highly stretched, the risk of a correction is very high in our view”.

Another strong performer in the agriculture sector so far this year has been hogs, with the Dow Jones-UBS Lean Hogs sub-index delivering a return of 28.81 per cent. According to ETF Securities it has recorded $5.9m of inflows into its ETFS Longer Dated Lean Hogs ETP as prices have surged 30 per cent in the wake of a swine virus, which is spreading across hog farms and reducing the supply of pigs for slaughter.