Investing in soft commodities is about to get easier

The rising price of soft commodities such as coffee and wheat is about to hit food costs in the shops. This might be bad news for inflation, but it's good news for investors. Especially now that a new way of investing in soft commodities has made this sector more accessible.

By John Stepek

published 31 August 2006

in Features

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The high street came back to life in August, according to the Confederation of British Industry.

Sales were their best since December 2004, and the CBI expects September to be a good month too.

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But every silver lining has a cloud, as they say - and in this case, the news of the post-World Cup rally suggests that the Bank of England will certainly be looking to raise interest rates again before too long.

And one specific aspect of the report will be of particular concern to the Bank - the news that the era of hefty summer sales may be at an end

The CBI's report on retail sales gave an upbeat assessment of conditions in August. In fact, conditions were so favourable that average selling prices rose for the first time in two years.

"Rising costs for energy and now also for foodstuffs have already caused retailers in certain sectors to start edging prices up," said CBI spokesman John Longworth.

The only thing that has been keeping inflation down in recent years is falling shop prices. If retailers have finally decided to stop absorbing rising costs, then all those 'second-round' inflation effects, that have been so conspicuous by their absence, are likely to make a sudden and unwelcome appearance.

The Bank will want to nip this in the bud - which suggests another rate rise is on the cards sooner rather than later.

It's unsurprising that shops are keen to push prices up. Soaring energy bills, minimum wage hikes - and now food prices are heading higher too. Coffee prices are near seven-year highs, while wheat prices in the US are expected to hit their highest levels in ten years after this year's global heat wave battered harvests across the world.

And of course, as prices rise, so does investment interest, which then pushes prices even higher. "It is going to be a year of tight supplies,' Mark Samson, vice president for South Asia of the US Wheat Associates told The Times. 'And with expectations of high world prices, more hedge funds are increasingly paying attention to this market.'

Up until now, if you've wanted to invest in soft commodities directly, the easiest option has been through the distinctly risky business of spread betting. But the good news for more conservative investors is that, according to The Times, you will soon be able to put money in soft commodities much more easily.

ETF Securities is set to launch 29 new securities that will track the price of cattle, coffee and sugar and several other softs, as well as energy prices and a range of metals. These Exchange Traded Funds are traded just like shares and offer a way to buy into softs without risking losing more than your initial stake - as you do with spread betting.

We've always been big fans of ETFs here at Money Week. Their strength is that they can be used to gain straightforward exposure to foreign markets, from Japan to Canada, without buying into funds ran by largely over-rated and underperforming managers. If you'd like to read more about ETFs, click here: Forget funds - it's picking markets that matters

And if you want to know more about soft commodities and why they could well be worth investing in, click here: Should you put your money in soft commodities

Turning to the stock markets

A strong mining sector saw the FTSE 100 make big gains yesterday afternoon, ending the day 41 points higher at 5,929. Higher metals prices put Vedanta, Anglo-American and Kazakhmys among the day's top performers. However, construction supplies company Wolseley outshone them all, fuelled by bid speculation. Anglo-American steelmaker Corus was the day's biggest faller after it announced a slump in pre-tax profits on the back of rising costs. For a full market report, see: London market close

Across the Channel, the Paris Cac-40 ended the day at 5,182, a 22 point rise. The Frankfurt Dax-30 was also higher, closing up 20 points at 5,867.

On Wall Street, stocks mainly ended the day higher, supported by falling Treasury yields which raised expectations that the Fed would reverse its interest rate hikes. The S&P 500 ended the day flat at 1,304, but the Dow Jones closed 12 points higher at 11,382 and the Nasdaq rose 13 points to 2,185.

The gains on Wall Street spread to Asian markets. In Japan, exporters were also boosted by the weak yen, leading the Nikkei to end the day 268 points higher at 16,140.

Crude oil was slightly higher again this morning, last trading at $70.35 in New York. Brent spot was at $69.24 in London.

Firm oil prices and a strong Japanese gold futures market sent spot gold higher again yesterday. It last traded at $619.20 in the early hours.

And in London this morning, BAA called on regulators to reject calls from airlines including British Airways and Ryanair to break up the seven airports it operates into separate businesses. Airlines are pressing for the moves which they believe will lead to improved competition and lower airport fees. But BAA argued in a statement this morning that any action could lead to reduced investment in airport capacity.

And our two recommended articles for today...

What highs will gold and oil head for next?

- As politicians "spend money into worthlessness", gold and silver become the obvious alternatives to the devalued dollar. When the credit bubble bursts, the price of gold should soar even higher says John Robson and Andrew Selsby of RH Asset management. To find out where gold - and oil will go from here, see: What highs will gold and oil head for next?

Can investment avoid a water crisis?

- Water shortages are set to be the cause of a great deal of conflict and misery in years to come, says Charles Stanley's Jeremy Batstone. Water treatment has grown into a $400bn global industry, but is this the answer? To find out why a lack of clean water will be the biggest cause of conflict in years to come and whether investment in new infrastructure can prevent it read: Can investment avoid a water crisis?

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.