Why soft commodities are booming

As the amount of available arable land in the world decreases, things are looking good for the agricultural commodities sector. Find out which funds will give you exposure to this boom.

Rising incomes and increased demand for Western-style diets in the four BRIC countries have made many an investor anticipate another booming asset.

That's because the amount of available arable farmland in the world is decreasing, giving a real prospect of a boom in the agricultural commodity sector.

This view was underpinned last month by the OECD, which predicted that as developing countries begin to exert their influence on world markets, we are set for a boom in everything from livestock to cotton.

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"Developing countries are now increasingly determining the contours of the world agricultural landscape and have effectively eclipsed the role of the developed countries in this respect," said an OECD report. "Brazil, India and China are becoming the new epicentre of forces shaping world agricultural production and trade."

Take China's influence on cotton, for example. It already makes up half the global trade in the white stuff, but that's expected to increase to two-thirds by 2010, twenty times what it was in 2002. In addition, the OECD reckons that global beef consumption will increase 31% by 2015, while corn prices should rise 29% in the next four years. What's more, prices in many soft commodities are at record lows, indicating an excellent buying opportunity.

Take cotton. It hasn't been this cheap since Idi Amin named himself King of Scotland and banned every curry house between Kampala and Moroto in 1972. Commodity guru Jim Rogers hasn't failed to take notice. "There will be fortunes made in the next decade," he has said. "Prices are historically very low and inventories are at their lowest for 34 years."

There are a growing number of funds in this sector: The Sunday Times points to two Goldman Sachs tracker funds called certificates, both of which track a combination of its agriculture and livestock indices.

One type offers a full capital protection feature, but on the downside, the indices tracked are excess return indices, meaning they are based on the return that commodities manage over and above cash.

If you want a total return certificate which includes the return that cash would manage you could look at ABN AMRO's total return certificates, which track the Rogers Agriculture Index. These are listed in several European markets.

You could also track a multiple-commodity index with a softs weighting see our article on riding the inflation wave for more on this.