Where to make a fortune in soft commodities

published 27 June 2007

Softs are on the move, with coffee at an eight-year high and corn (maize) and wheat reaching ten-year highs, and their long-term prospects are positive. World food stocks are historically low and industrialisation is reducing the amount of cultivated land, while each year the world has an extra 50-75 million mouths to feed. Mounting affluence is changing diets; the OECD sees beef consumption rising by almost 33% in the developing world by 2015 and it takes 8.3 grams of grain to produce one gram of beef. German coffee consumption is about 50 times China's.

The green energy craze is also boosting softs. Palm oil, used in cooking and as a fuel, has risen by more than 25% this year to a record high, while ethanol production will rise ninefold by 2009, according to Roland Kitson of Close Fund Management. Land shifted towards its production reduces supply of other foods and energy sources. Goldman Sachs is forecasting another 40% jump in corn over the next five years, while Jim Rogers expects "fortunes to be made" in agriculture in the next decade.

How to invest in soft commodities

The easiest way to play softs is via London-listed ETFs tracking individual raw materials ranging from corn and wheat to soybeans and coffee. Bear in mind, though, that an ETF tracking a basket of grains or the overall Dow Jones Agricultural index is likely to be less volatile. Neil Woodford of Invesco Perpetual likes Aim-listed ethanol producer Clean Energy Brazil (CEB, 121p), which we highlighted in February, while the palm-oil play we tipped last year, MP Evans (MPE), has risen strongly and looks worth holding.