In keeping with the global march upwards in commodities prices, soft commodities prices have spiked after markets were spooked by a US Department of Agriculture (USDA) report which slashed forecasts of global grain stocks.
The USDA said grain supplies were “expected to fall dramatically” with stocks of coarse grain in the US and European Union likely to halve and corn stocks in the US also likely to halve. Weather problems and natural disasters such as the central Asian wildfires have hit northern hemisphere production hard. This is a major concern considering the soft commodity spike of 2007-2008 prompted food riots in several parts of the developing world as soft commodity inflation soon worked its way through to consumer markets.
Corn prices leapt to a two year high on Monday after an 11 per cent spike over two trading sessions, prompting Morgan Stanley’s head of commodities research Hussein Allidina to say: “I think we have a food crisis now.”
Soft commodity markets are notoriously volatile, but a prolonged spike in soft commodities, fuelled by sustained weakness in the dollar, could quickly feed through into consumer price inflation. Food producers could find themselves squeezed between rising input costs and an inability to pass such costs on to struggling consumers. Indeed the US meat industry, which relies heavily on grains as feedstock, has already described the latest crop figures as a “game changer”. Furthermore, grain-based ethanol producers, such as Aim-traded GTL Resources, could also see margins come under pressure.
And it is not just grains that are rising. The weak dollar has whetted appetites for commodities across the board with sugar and palm oil also enjoying recent strength. Liberum Capital analyst Nick Walker said: “I see this going on for a while.” His clients are confident prices will remain high with Ukrainian grain producers such as Aim-traded Landkom indicating they will hold on to their production for sale early next year. Mr Walker believes poor conditions in Russia and Canada over recent months, coupled with the La Niña weather phenomenon in the southern hemisphere, could keep production levels under pressure for some time.
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For UK investors the opportunities to play this game are limited to agricultural funds, smaller companies such as Landkom, or overseas players like Stockholm-listed TrigonAgri. Another way to play the theme on a longer term view is through an instrument such as ETFS Agriculture, which tracks a basket of soft commodities but offers no income. If you hold shares in food producers, be wary of the effect on margins if the current surge in commodity prices becomes entrenched.
