The soft commodity space is varied, ranging from cocoa to coffee to sugar, and while the focus has been on oil, gold and industrial metals and the effect on these of issues such as China’s slowing growth, agricultural commodities appear to have been somewhat under the radar.
In the past 12 months the broad S&P GSCI Commodity index has struggled, falling 6.4 per cent in the year to July 6 2016, yet on a sub-sector basis there are soft commodities that have delivered strong returns.
The S&P GSCI Sugar Spot index gained 99.6 per cent in the same period, while the S&P GSCI Coffee Spot index climbed 43.4 per cent. Conversely wheat has been among the worst-performing agricultural staples, with the S&P GSCI Wheat Spot index losing 19.7 per cent in the 12 months, data from FE Analytics shows.
One of the main reasons for the wide range of performance is the fact the main driver for agricultural commodities is the weather, with last year’s El Niño causing a number of issues such as a monsoon rain shortfall across various parts of Asia and Latin America.
Sarasin Food and Agriculture Opportunities
Managed by Henry Boucher with Ed Bailey as deputy, this £92m fund aims to achieve long-term capital growth by investing in food and global agricultural companies. The vehicle was launched in March 2008 and has delivered a steady performance, including a return of 27.4 per cent for the five years to July 6 2016. Its largest sector weighting at 27.1 per cent is to processors, closely followed by producers at 23.3 per cent. The largest regional weighting is to Europe ex UK at 36.7 per cent, with North America, the area usually favoured by agriculture funds, accounting for 24.6 per cent.
Liontrust GF Global Water and Agriculture
One of the more recent offerings in the space, this Dublin-based fund launched in January 2016 under the stewardship of Hugo Rogers and Kristof Bulkai. The £2.5m vehicle aims to exploit the opportunities created by changes in the water and agriculture and related energy and environment sectors. The fund’s hedged sterling share class has delivered a reasonable 0.5 per cent return for the three months to July 6, with the largest sector weighting to industrials at 43.4 per cent of the portfolio.
Impax Food and Agriculture
This Dublin-domiciled fund was launched in November 2012 with the aim of generating long-term capital growth by investing in the securities of issuers involved in agriculture and food-related activities worldwide. Managed by Michael Landymore, the vehicle is one of the smaller offerings at just £2.7m, but it has delivered consistent performances including a three-year return of 27.5 per cent, data from FE Analytics shows. The portfolio’s largest sector weighting is to packaged food and ingredients at 26 per cent, while the largest regional weighting is to North America at 41 per cent.
Mihir Kapadia, chief executive of Sun Global Investments, notes: “There has been some deficit this year, but because of the El Niño effect we’ve had a much better monsoon season, despite a little bit of a delay in monsoons coming. This will help the various monsoon-dependent crops like sugar cane and others.”
“El Niño disrupts entire weather patterns. It either delays the rainfall or reduces the amount of water that is needed in certain parts of the world. Last year it certainly affected a few crops. This year we find it is less the weather that is affecting crops and commodities prices, but more the regulations and government interventions, such as regulating exports, reduction of trading quotas.”
While the effects of El Niño are dissipating, a new factor to weigh is the emergence of a stronger La Niña phenomenon, effectively the opposite weather to El Niño.
Gertjan van der Geer, senior investment manager on the Pictet Agriculture fund, explains: “We are now seeing soya and sugar prices increasing, while corn and wheat remain at low levels. Certain weather patterns could affect this, especially if La Niña comes to fruition. The result of La Niña is typically accompanied by cooler and wetter weather in the Pacific Northwest, while bringing drier weather in the US southern plains and Midwest and South America. It brings more rain to Australia and Southeast Asia.
“La Niña normally has a large negative impact on grain production. US crops are in good condition today, but a sudden switch to hotter and drier weather could impact this year’s North American harvest if La Niña hits quickly. This would result in higher soft commodity prices and therefore a more profitable operating environment for farmers and farm input providers as farmers increase spending in reaction to maximise harvests as profitability of the crops rises.”
As an asset class agriculture is certainly niche, but with a low growth and low interest rate environment set to remain in place, investors looking for alternatives could see some opportunities.