Four Ways To Profit From A Soft Commodity Bull MarketGeneric...

Four Ways To Profit From A Soft Commodity Bull Market
Generic Avatar
By Alun Morris | 17 July 2007


"We will be paying more for everything. In fact, we already are and it will get worse." Jim Rogers

That's not good news. The US legend who built the Quantum fund with George Soros is talking about global food prices. Rogers foresaw this decade's commodity boom when he visited China in the 1990s. Metals and oil have boomed but agricultural staples have fallen. He thinks it's catch-up time.

Our own metals bull, Jim Slater, is also turning soft. He fears a pri/cking of the private equity bubble will trigger a general market crash and has been selling metals to buy land to grow grain, in Australia, South America and the USA.

Turning crops into bio-ethanol and bio-diesel is the plat du jour for politicians everywhere. Many believe that this is window dressing and can never substantially replace crude oil. Nevertheless a high oil price and enviro-politics will support the price of crops, if not drive them up.

If you believe that wheat, corn and soyabeans are in for a long bull run, here are four ways to take advantage, starting with the safest.
1. Farmland

Jim Slater is buying thousands of miles away. You can buy British farmland at auction from about £4000 per acre. This is far cheaper than in most of Europe and you can claim an annual bung from the EU just for owning it, until 2013 at least. There's lots of paperwork and conflicting opinions about what you have to do to qualify for the subsidy, so this is not a simple an option as it sounds.
2. Exchange Traded Commodities

Last year, buying into commodity indices became a lot easier when ETF Securities launched Exchange Traded Funds to track various soft commodities. These Exchange Traded Commodities (ETCs) are bought and sold just like shares and can sit in your ISA. Before you dive in check out these ETC Data Sheets. The London Stock Exchange also has delayed ETC prices.

You can track a single commodity like corn with ETFS Corn [LSE: CORN] or a basket with ETFS Grains [LSE: AIGG]. If you want the greatest diversification try ETFS Agricultural [LSE: AIGA] which tracks the Dow Jones Agricultural Index.
3. Plantations

There are not many pure plantation plays listed in the UK. Anglo-Eastern Plantations [LSE: AEP] produces palm oil in Indionesia as well as beef in Australia. At 415p its historic PE ratio is 19.6 with no forecast for 2007.

MP Evans Group [LSE: MPE] has palm oil plantations in the far east and has a racy PE of 35.2 falling to a prospective 18.5 for 2007. Kevin Godbold looked at this company in Could This Investment Beef Up Your Portfolio?

Both have had strong runs this year. Their tangible book ratios at about 2.6 are high so it may be that all the optimism is currently in the price.
4. Spreadbetting

You can bet directly on what you think the price of for example UK or US wheat will be in several months time. However this is more suited to traders than investors. The high volatility and gearing available on commodity bets has both made and lost fortunes.

Be warned that soft commodities are very volatile. Production is regularly hit by bad weather and disease. Different crops have different length boom and bust cycles. However with a long view it may be a sensible diversification for your portfolio.