Rising prices have sparked investor interest in food commodities. But it’s a risky proposition and not all investors will be comfortable speculating on a market often driven by human misery.
Low crop yields, caused by a range of poor weather conditions including the United States’ worst drought in 50 years, pushed global food prices up 6% this summer, according to Maplecroft’s Food Security Risk Index. This led to fears of a repeat of the 2007/2008 food crisis, which had resulted in riots in several countries, including Burkina Faso, Cameroon, Senegal, Mauritania, Côte d’Ivoire, Egypt and Morocco.
Maplecroft predicts a 15% rise in food prices by June 2013, resulting in record highs that will squeeze household incomes around the world. As well, food stocks are expected to remain low, leaving little resilience to future shocks in the global food supply.
Except for a blip during the 2008 fi nancial crisis, commodity prices have been on an upward trend since 2001, according to Winnipeg-based commodities futures broker R.J. O’Brien.
Futures contracts have moved in tandem with commodity prices. Financial institutions have responded by introducing specialty funds that allow investors to take advantage of rising commodity prices, such as the BMO Agriculture Commodities Index Fund, an ETF designed to replicate the performance of the S&P GSCI Agriculture Enhanced Capped Component Index.
Mark Webster, BMO’s vice president of ETFs, says food commodity investors are better off in futures-based products instead of agricultural equities, which are only 40% correlated to food-price movements. “Moreover, investors who choose equities also have market-driven risk. So if commodity prices are going up, but equities are going down, your agricultural equities are going to go down with the market. That’s why we feel so strongly about getting that exposure through futures, which are correlated 99%to price movements.”
A number of European banks have withdrawn funds that allow investors to speculate on food prices. It’s raised a debate over what’s causing prices to rise.
“One of the prevailing myths is that futures-based commodity investing is driving prices. That’s actually not true,” Webster argues. “There’s been a reduction in the assets under administration in futures in the United States, when the key drivers—wheat, soybean and corn—have all gone up signi cantly this summer. So the speculation issue doesn’t bear out. If there was speculation, we’d expect the assets to increase when these commodities were rising signi cantly over the summer with droughts. That’s not what we saw.”
Still, there’s concern over food commodities investing. Montreal-based research firm Groupe Investissement Responsable recently completed a research paper on food commodities and SRI, concluding that index products, as well as direct investment in agricultural equities, have a speculative impact on prices.
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GIR president and chief executive offi cer Olivier Gamache says investors who want to apply SRI strategies should avoid products that have speculative aspects or put pressure on the price of commodities.
Further, such commodities no longer offer diversifi cation, Gamache says, as they are now directly correlated with the traditional stock market. “From an investor’s point of view, it’s not positive because it doesn’t diversify your portfolio the way it used to.And it puts pressure on commodities prices.”
Stephen Whipp, senior fi nancial advisor of Stephen Whipp Financial at Manulife Securities in Victoria, says, “I have a moral problem with things like futures—it’s gambling on the price of food going up, and to me, food is one of those things that everyone should have a right to have.
“To take advantage of situations that arise because of market conditions caused by climate change or some other shortage, that’s not the kind of society I want to be part of, so we don’t go there,” he adds, noting his firm, which specializes in SRI, has no investments in any publicly traded agricultural companies. “That doesn’t mean we’re not looking for good, sustainable agriculture investments.”
Jennifer Penikett, associate analyst at research firm Sustainalytics, believes food commodities can be appropriate for responsible investors. She says shareholders can push companies to be more transparent regarding supply chains, and to disclose where commodities are sourced.
“Investors can persuade companies to develop robust supply chain programs to address the social and environmental risk. Companies can mitigate the risk from reduced commodity availability by developing long-term, capacity-building programs and educating and assisting farmers on how to deal with the effects of climate change.”