Agricultural commodities could be poised for stardom in 2010 as weather concerns and alternative fuel needs throw up strong fundamentals, after lagging other commodity sectors this year.
Softs, in particular sugar, will be volatile into 2010 – but offer good returns for those with a strong stomach – due to persistent rains in top producer Brazil, and India, the world’s largest consumer, shifting from a major exporter to an importer.
“Sugar has very strong fundamentals that are here to stay for more than a few months,” said Emmanuel Jayet, a commodities analyst with Societe Generale.
Peter Lucas, investment strategist with RBC Wealth Management, said softs offered good value, but also singled out corn and wheat for next year.
Corn consumption has risen to record levels, boosted by the expansion of the U. S. ethanol program, leading to a draw-down in global stocks.
The International Grains Council last month forecast corn stocks at the end of the 2009-10 season ( July-June) would fall to 134 million tonnes, down from 147 million a year earlier.
“In my opinion corn is the market which gives the trend of the grain market in general and we will have decreasing stocks. I think corn prices will increase next year,” Societe Generale’s Jayet said.
“Ethanol consumption in the U. S. is breaking new records every month,” he added.
BEHIND THE CURVE
Lucas said agriculturals had lagged a cyclical-driven rally in which base metals outperformed due to expectations of growing demand as the global economy recovered.
Copper has surged 117 per cent since the end of 2008 and crude oil is up 98 per cent.
Among agriculturals and softs CBOT wheat is down 15 per cent, corn is off 8.6 per cent, cocoa is up 23.5 per cent and arabica coffee is up 27.6 per cent.
Lucas also said “the overall environment is competitive for a commodities rally, because of the weak dollar.”
A weaker dollar makes investment cheaper for holders of other currencies. The U. S. dollar has fallen 6.5 per cent so far this year against a basket of currencies and is widely expected to extend that drop.
But investing effectively in softs will be a question of getting the right balance between fundamentals and technical charts. Softs’ performance has varied greatly due to their separate fundamentals.
Raw sugar, for example, has soared 111.7 per cent since the end of 2008, largely because of India’s poor harvest, and on expectations of another disappointing crop next year following a weak monsoon.
Cocoa set the highest levels in nearly 25 years in London a week ago, powered by expectations of improving demand and worries over tight supplies from top producer Ivory Coast and other key West African growing regions vulnerable to disease and pests.
Commodity fund manager John Di Tomasso, president of Di Tomasso Group Inc. in Victoria, Canada, advocated a “middle approach” to investing in soft commodities, particularly after new milestones set in recent weeks by sugar, cocoa and coffee.
“We think some time in the next few years, the softs in general will do well, but some specific softs are overpriced at the moment,” Di Tomasso said.
Improving prospects for grindings (a measure of demand) as the global economy shows signs of recovery has also supported cocoa.
“It is very clear that grindings are starting to recover, the onus is definitely on the supply side to be able to deliver and it just doesn’t look likely,” said Kona Haque, commodity strategist with Macquarie Bank.
Arabica coffee has risen by a quarter this year, driven by increased fund activity, the weak dollar, robust demand, and recent concerns over falling Colombian coffee supplies due to poor weather and a program to replant ageing trees.
There are also worries over weather in top coffee producers Brazil and Vietnam.