InvestmentsMar 24 2014

Snapshot: Risky area that can result in big rewards

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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.

Meanwhile corn and wheat have also benefited from a recent increase in prices, with the sub-indices delivering positive returns of 12.59 per cent and 8.52 per cent respectively. The latest report from the Foreign Agricultural Service, part of the US Department of Agriculture (USDA), notes that global production of wheat is slightly higher at the start of the year helped by larger crops in Australia and India that are partially offsetting reductions in China, Paraguay and Uruguay.

However, it notes higher prices are appearing as Middle Eastern and North African countries increased their imports of wheat. These include higher imports from Iran, Morocco, Russia, Saudia Arabia and Syria. But given the political situation in Russia and Ukraine, with both of these countries in the top 10 exporters of wheat, if the issues there are not worked out quickly, this could further drive up the price of wheat.

Overall, the soft commodity sector of agriculture looks more promising, but as the situation in Ukraine highlights, it is not just the effects of Mother Nature that can boost or reduce prices and performance, it is also influenced by political decisions. This makes it a risky proposition, but with the right decisions it can also be very rewarding.

Nyree Stewart is features editor on Investment Adviser