Commodities | Jan 18 2008
By Chris Shaw
For many years investors have steered clear of agricultural commodities as investment alternatives as the combination of the high cost of carrying the investment and relatively short production cycles that didn’t create the same supply/demand imbalances as other commodities meant there was a reduced level of attraction.
But in the view of Barclays Capital the past few years has seen a structural change in world grain markets, as increasing Chinese demand is coming at the same time as a boost to demand from the growth in biofuels, which has added a level of inelastic demand to grain markets that previously was not present.
As an example the group notes 24% of the US corn crop and 30% of US corn use is now being diverted to biofuels, compared to 6% and 8% respectively in 2000. The result is low inventory levels, with Barclays noting corn, wheat and soybean stocks are now at 24-year lows despite production at record levels.
As with the other commodities supply disruptions have also contributed as unusual weather patterns have in recent years limited the supply of grains available in the global marketplace. Australia is an obvious example as the wheat cropped has halved in the past two years given the impact of the drought.
This growing supply and demand imbalance means that the grains have been the best-performer of the commodities in recent times, a trend Barclays expects will continue.
One reason for the optimistic outlook is the sector is relatively immune from the uncertainties being created by the current economic conditions around the world, as grains are a staple and so not as subject to any sudden or unexpected fall-off in demand.
This is not to say there is no demand volatility, as Barclays points out there is generally a higher level of speculation in grain markets than in other commodities. The point of note in the group’s view is this level of speculative positions has not increased proportionally as prices have risen, implying the prices for gains are in line with the market’s fundamentals given the widening gap between global supply and demand.
Given this, Barclays’ view is grain prices have further to run in the coming year.
