Hard cash from soft commodities Kevin Andrusiak November 19, 2005 HOW many people could pick a soybean out of a legume line-up? Or think there could be money made out of trading frozen orange juice concentrate?
Market watchers say it could be time to start thinking outside the box when it comes to commodities trading.
While recent rises in base metals and energy commodities have been spectacular, tucked away in the list of big earners over the year were some little-known futures contracts with some impressive gains.
Take frozen orange juice concentrate and sugar: futures contracts for both have gained more than 30 per cent this year and touched record levels in recent months. Even soybeans have moved an impressive 7.7 per cent higher in 2005.
This is the unfashionable end of the market, despite commodity trading becoming a popular way to diversify a portfolio.
The Reuters-CRB index, made up of 17 commodities futures, is trading near 25-year highs after heavy buying in contracts for things like nickel and copper.
Copper is approaching a record $US2 a pound after reports that a rogue trader from China committed the country to delivering 200,000 tonnes.
But the lesser lights have added to index gains.
Concentrated frozen orange juice has been hotter than crude since hurricanes Katrina and Wilma devastated the US southeast, on fears big citrus crops in Florida had been wiped out. Last week the December futures contract climbed to its highest level since October 1998.
The price has doubled since June 2003 and has outperformed crude oil futures since the start of the year.
Sugar futures have rallied with the oil price as ethanol becomes more attractive as an energy source, particularly for motor vehicles.
Already a number of European and South American nations add ethanol to their fuel mixes.
In the live cattle market, futures have moved higher as the world demands more steaks on plates.
What are the reasons for the bounce in these soft commodities?
Analysts say soft commodities can provide a good hedge against inflation, making them attractive to investors as nerves grow over US rate rises.
But the supply and demand fundamentals still play the biggest part.
Greg Smith, founder of niche firm Global Commodities Traders, says the softer commodities are generally thinly traded, which puts a lot of people off, but the investment theory is the same.
"There is a constant grinding demand for all agricultural commodities," Smith says.
"As a planet we are consuming more and more but there are lower and lower inventories. And all we are doing in this whole resource thing is constantly playing catch-up.
"I think the story to look out for is sugar."
More often than not, soft commodities like wheat and sugar follow a seasonal cycle.
But there are other factors that have helped the generous price rises.
These include the mass of money moving into the area of commodities trading and strong growth in developing nations such as China and India.
Since about 2002 commodities have been gaining popularity, with record investment of $18.7 billion last year by US mutual funds alone.
Trading against the Goldman Sachs Commodity Index, one of the most traded in the world, has risen from $US8 billion in 2000 to $US70 billion in 2005.
Analysts agree the outlook for commodities trading is strong, particularly for energy and base metals.
Futures contracts for agricultural commodities will largely depend on supply and demand.
Stefan Weiser, head of Asian commodity investor sales at Goldman Sachs, says the rally in the commodity market has not been driven by speculation or "hot money" but rather the lack of infrastructure spending.
He says many agricultural commodities have also mirrored the good times in the resources sector. "When GDP increases in countries like China and India people eat more foodstuffs. China is bullish for beef and grains."
