Choose carefully when investing in commodities because prices can fall as fast as they rise
Author of the article:
Financial Times
Stefan Wagstyl
A wheat sample is inspected at a Viterra grain elevator near Rosser, Manitoba. Photo by Shannon VanRaes/Bloomberg files Rising food prices are ringing alarm bells for households all over the world. Food banks in the United Kingdom say they have never been busier. Supermarkets in Italy have reported panic buying. And in Iraq there have been bread price protests.
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Food costs were increasing even before the Ukraine war, driven by higher energy prices, transport bottlenecks and, in some countries, farm labour shortages. Now, Russia’s invasion has triggered further rises and concerns about prolonged disruption in agriculture-rich Ukraine.
Does this mean it is a good time to invest in farm commodities? Especially as equity valuations remain high, despite the turmoil caused by the war, and rising inflation is putting pressure on bonds.
It’s true that commodities have proved to be a decent investment at times of high inflation in the past. But you have to choose carefully, as these can be volatile markets where prices can fall as fast as they rise.
It’s no surprise that wheat prices are up more than 40 per cent since the start of the year, since Russia and Ukraine together supply some 30 per cent of world exports.
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Supply fears have spread across agricultural markets, with prices for corn, soybeans and beef all well up this year.
The concerns are even more acute in fertilizers, a key input, since Russia and its ally Belarus supply fully 40 per cent of global exports. CRU Group, a research company, calculates prices are up by about 30 per cent, which may not sound too serious in the circumstances, until you consider they have risen threefold since early 2020.
“The current conflict in Ukraine is likely to generate an immediate impact on global wheat market stability and, by disrupting natural gas and fertilizer markets, have negative impacts for many food producers,” the International Food Policy Research Institute said.
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Buying wheat wholesale — as you might gold — is obviously not practical for the average private investor. But the futures markets are very well developed and there are hundreds of exchange-traded funds (ETFs), both for single crops, such as wheat, and for diversified baskets of agricultural commodities.
The BlackRock Inc building in New York. Photo by REUTERS/Lucas Jackson/File Photo BlackRock Inc., the investment house which runs a stable of commodities funds, said that while “commodity trading can carry risk” it can offer “diversification and the potential for upside performance.”
Still, before you take the plunge, look at some commodity charts to see how wild the price swings can be. How comfortable would you be on such a financial rollercoaster?
For example, wheat gained 92 per cent in the five years between 2017 and 2021. But it dropped every year between 2013 and 2016, with a cumulative loss of 46 per cent. Over the decade to the end of 2021, you would have made around 15 per cent — not much of a reward for a stomach-churning ride.
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There is also an ethical question to consider. Throughout history, grain speculators have had a decidedly unfavourable reputation. Quite unfairly, say professional traders, who argue that financial investors give markets the liquidity needed to transmit price signals quickly. Yes, prices might spike if investors pile in, but the upswing gives farmers a bigger incentive to plant more and relieve any shortages. At the end of the day, grains are cheaper and so is bread.
After the last great grain price surge, in 2007-8, a report from the United Nation’s Food and Agriculture Organization (FAO) found: “Available empirical evidence does not support claims that non-commercial traders have increased the volatility of grain prices.”
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More On This Topic The U.S. yield curve has inverted: What is it telling investors? Tom Bradley: Getting back to normal is great, unless you’re an investor David Rosenberg: Three investing themes beyond energy in these uncertain geopolitical times Nevertheless, you may want to keep quiet about your grain stocks. Public prejudice runs deep. Well after the FAO published its research, leading charities, headed by Oxfam, successfully campaigned to drive some banks to close agricultural commodity funds.
In any case, there are other options, notably equities. Scores of companies are active in food production, starting with some very well-known names. Nestlé SA, the largest by sales, is a core element of many a portfolio and fund. Other giants include PepsiCo Inc. and Unilever PLC.
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Article content Solid companies, right for uncertain times, I’m sure. But they may not give you the exposure you want to commodity markets. These groups sell products in which commodity costs are generally only a fraction of the final prices, margins and profits. “You may not see much of a change in the price of packaged bread at Waitrose, but in the Middle East prices are rising fast,” Carlos Mera, head of agri-commodities market research at Dutch bank Rabobank, said
Not surprisingly, Nestlé’s shares are barely changed since pre-crisis. They dropped when the fighting began (the company is big in Russia), but then bounced back (the Russia business is a small chunk of the whole).
To get closer to the sharp end, you might consider the global grain-trading companies. Chicago-based Archer-Daniels-Midland Co., which has investments worldwide, including in eastern Europe, has seen its shares rise 15 per cent since the conflict began and 26 per cent since the start of 2022. Bunge Ltd., a rival, has posted similar gains.
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Article content The wearhouse at Nutrien’s Cory potash mine near Saskatoon. Photo by REUTERS/Nayan Sthankiya/File Photo Or how about fertilizer producers? The choice is trickier: some make fertilizer by mining and converting potash from their own reserves, so they have some protection against rising natural gas costs. But others use ammonia — a feedstock based on natural gas — and so are exposed. Nutrien Ltd., the Canadian potash giant, has seen its stock leap 37 per cent since Vladimir Putin’s tanks rolled in and 43 per cent since Jan. 1. But shares in Yara International ASA, a Norwegian rival with gas-based feedstocks, are flat.
Of course, there are numerous funds and investment trusts focused on agriculture, which will give you diversification as well as exposure, limiting your risks. For example, the MSCI Global Agriculture Producers ETF has names such as Nutrien and Archer-Daniels-Midland among its top three holdings, as well as tractor maker Deere & Co.
Clearly, a lot depends on how long the Ukraine war lasts. Nobody knows, so no one can tell whether 10 per cent of this year’s Ukrainian harvest will be lost or 50 per cent. Planting is due to start in a few weeks.
But high prices may persist, given all the other forces driving them up, especially energy costs. Even though the initial boost to the market has already made itself felt, there could be more to come. These are inflationary times.
Stefan Wagstyl is editor of FT Money and FT Wealth.
The Financial Times Ltd
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