Soft Commodities - surely a good long term bet?
I know there has been a fair bit of talking up in this sector recently, which does make me wary. However, considering the long-term fundamentals of it I am struggling to think of reasons why not to buy into this sector.
- Growing population = more demand
- Growing wealth in China and India = more demand
- Climate change -> crops going to biofuels = less supply
- Climate change (if you believe in it) = less supply through drought, storms, rising sea level (less fertile land)
- Developments in fertilizer technology are having less and less impact on crop yields
In short, supply is struggling to keep up with demand. Short of a major breakthrough in genetic engineering, I can't see this trend reversing.
Can anyone come up with some good reasons why not to buy into this for the long-term?
Best Answer
2775 points
Oldman answered one year ago …
There are specific "soft" commodities, that are Exchange Traded Commodities, available from the London Stock Exhange(Euronext) under the generic symbols: ETC's. Thus you could buy a high demand commodity in short supply = cotton, or a specific oil, such as palm oil.
The demand and supply for these commodities will rotate due to climatic and geopolitical events or even due to power outages in S.Africa (which has shut down mining). But you need to be nimble because the markets move swiftly on real data and rumors. The broader ETF's, such as DBA and MOO have larger holdings of "soft" commodities than the Energy-biased DBC, etc.
For what it's worth: Over the past 60 or so years, Timber has outperformed most stocks and indexes. Noe that "land" values of some of the major timber REIT's are beginning to lose value, the these stocks may become more reasonable, so compare their prices today to what they were in the last housing slowdown, and decide if - with their dividends- they now make sense for you: JOE, PCL, RYN, ALEX, TWTUF, etc. Other "Timber Co.s" are really papermakers like Abitib-Bowater and Weyerhauser - their prices are based on pulp for paper. Others, like Vorantrim, are big in S.America ... and may continue to pay substantial dividends.
The more general response to your question, given by Teeka T., above, is also most appropriate, but commodities are great diversifiers for stock & bond portfolios, so if you have none, now might be a reasonable time to get your feet wet.
Answers
196 points
TeekaTiwari answered one year ago …
In my opinion short of a massive and sustained global growth slow down the commodity growth story has legs for many years to come. Again in my opinion the way to play the group for maximize returns is to take advantage of the times when various commodities go out of favor. For instance in 2006 the oil service, refiners and production guys were all being shunned.
In a long term bull market sectors will go through periods where they under perform . If you believe in the long term macro trend then that weakness should be bought into.
3963 points
MNSL answered one year ago …
In the longer run there is huge potential in this sector. I don’t think there is a valid reason to give that there is no long value in soft commodities at this moment. It is too early to forecast about long term value of soft commodities now. However we can see some sort of corrections time to time due to change of positive fundamentals. I think it is better to buy when it is out of favor. Investors who invested 05 years before in stocks related to soft commodities and directly into commodities are the best winners in this sector now.
According to some analysts rallies in this sector are still in their infancy. The fundamentals for grains and oilseeds have become increasingly bullish, and prices will rise higher and for longer than previously expected as stocks remain low. We can definitely see there is a strong market for some soft commodities until 2009 due to above facts.
This sector will be favourite commodity sector during 2008.
Currently there is huge potential for some soft commodities due to following reasons:
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Higher demand due to the emergence of new powerhouse economies, mainly China and India
General global economic and output growth
Rising living standards especially in the emerging market countries
Expansion in world ethanol and bio-diesel production
Geopolitical risk, Lack of arable land and change of weather patterns
Slow replenishment of new stocks
Gradual Allocation of funds to soft commodity sector by fund mangers
To a lesser extent – a weakening US dollar against other major currencies
Pl see further information from following links:
http://www.eiuresources.com/mediadir/default.asp?PR=2007080901
