Asset managers are predicting that global warming and accelerating population growth will fuel demand for commodities, in particular so-called soft commodities.
Oils and metals are the best known investable natural resources but interest is now turning to funds which invest in what Fidelity American special situations fund manager Bob Haber calls the 3 Fs – food, fuel and feed.
These tap into the world’s rapacious demand for food as well as the need to invest in alternative fuel sources.
Clerical Medical group economist Tim Crawford says the price of soft commodities has risen sharply over the past few years. Since April 2002, the price of soya oil has risen by 109 per cent, Brazilian coffee 104 per cent, palm oil 81 per cent, corn 79 per cent, raw sugar 58 per cent and wheat 58 per cent.
Crawford says two factors are driving demand for these commodities – rising living standards around the world, leading to greater demand for food, and demand for biofuels. He says: “Developing nations are consuming more meat as their populations become richer. In China, meat consumption has risen dramatically over the past few years. As it takes several kilograms of foodstuffs to produce one kilogram of meat, it is easy to understand why demand is rising,” he says.
At the same time, global reserves of grain are falling because more is being consumed than produced.
Crawford says: “New land is being cultivated only slowly. Added to this, drought in some key producing nations has hampered supply.”
F&C Pacific growth fund manager Mark Williams and Pacific assets trust manager Peter Dalgliesh believe that soft commodities are an untapped area of growth.
Williams says increasing demand for biofuels as an alternative to fossil fuels means that food matter is increasingly being used as a source of fuel. Supply of grains such as wheat and soya is also being squeezed by the growing affluence of developing countries where a rise in the consumption of meat is driving up demand for corn to feed livestock.
He says: “According to recent statistics, China’s meat consumption has risen by 50 per cent over the last 15 years but is still some 25 per cent below that of the developed market average, which provides scope for further price appreciation.”
Schroder Alternative Solutions agriculture fund manager Rodolphe Roche says unlike oil and metal, agriculture prices have not yet risen significantly.
He says: “Historically, this is typical of commodity bull markets, with agriculture prices lagging energy and metal prices. However, increases in food prices are now regularly making the headlines and we think that agriculture investments are an ideal way to keep up with rising food prices.”
In the past, emerging countries often exported a lot of agriculture products. Roche says: “Issues common to developing countries, such as desertification, urbanisation and drought, make planting and harvesting crops increasingly difficult and costly. As countries evolve, urban areas increase at the expense of arable land.
“China has become a net importer of soya bean meal as it no longer has the necessary land to satisfy its growing livestock industry. In fact, land available for farming is decreasing steadily worldwide.”
Roche predicts that demand for biofuels will boost prices of sugar, palm oil, corn, soya oil and rape seed. He says: “Supporting our expectations, the US has set a target of increasing its production of ethanol – which is produced from corn – by 900 per cent in the next 10 years.”
The fund’s biggest position is in grains, favouring corn and wheat. Other soft commodities are also in its sights. Roche says: “Coffee prices in London recently reached an eight-year high, driven by short-term tight supplies in Vietnam and some severe winter weather concerns in Brazil.”
Haber denies the increase in commodity prices is a bubble waiting to burst. He says: “Far from reaching bubble proportions, in many cases commodities remain mispriced. They are being driven by a deep-seated secular trend that will support prices for many years.
“My contention is that they are now in a secular trend, rather than the traditional cyclicality seen in the past. The supply side for many items is not as flexible as before and demand is likely to keep growing for many years to come.”
Dalgliesh says the supply and treatment of water also presents good growth opportunities as this is another commodity that within the next decade will become scarce enough to command big returns.
He has invested in Hong Kong-listed China Water Affairs in his Pacific assets trust. He says: “Expanding urbanisation, industrialisation and affluence across Asia has seen the demand for clean water increase.”
The move towards alternative energy is also boosting demand for palm oil and the cleaner coal-derived fuel dimethyl ether or DME. Both Dalgliesh and Williams have invested in palm oil in their portfolios, including leading Malaysian palm oil player IOI Corporation and China Energy, which makes DME, mixed with LPG and used for domestic gas.