Solid Prospects Ahead For Soft Commodities

Soft commodities –- soybeans, sugar, corn and other crops -– will be the winning sector this year, some market experts now predict.

Hard commodities, oil, gold, platinum and the like, came into favor last year and continue to be investors’ darling, but soft commodities will have their turn now, many experts believe.

Driving it all is unprecedented demand: Droughts overseas have cut supply, biofuels have increased consumption, and growing use from China, India and other emerging markets – short of a global economic collapse -– are likely to support long-term demand.

A worldwide increase in population and wealth has fed an appetite for goods most Indians and Chinese now consider luxuries -– coffee, sugar and meat. Since 2000, world population has increased 13%, income by 35%, and meat consumption by 25%.

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Increasing use of ethanol and other biofuels, supported by government subsidies, has boosted demand for crops. Demand for biofuel crops could double by 2030.

One out of five bushels of corn grown in this country is already used for ethanol and the goal is to run half of American-made cars on ethanol-gasoline blends by 2012.

Wheat, soybeans, corn and other foodstuffs are reaching record highs. Food prices, rose 4 percent last year, and will probably rise another 4 percent this year, experts believe.

Plus, housing and credit-spawned problems continue to limit good investment alternatives, prompting investors to seek new places to plant their funds.

Soft commodity prices have increased 29 percent over the past five years, not as much as precious metals, up 168 percent, but soft futures, have jumped over 20 percent this year, points out Jonathan Boyden, head of sugar trading at Ambrian Capital.

"A lot of the driving force in softs is a pick-up of what has happened in energy," Boyden said. "It's not just about food any more."

Investors jump on this hot trend – which also includes coffee, cotton, cocoa, and even orange juice – directly through futures contracts on mercantile exchanges such as the CME Group.

Investors can also buy exchange traded funds or exchange traded notes concentrating on one crop or a basket of sifts for greater diversity and less volatility.

Powershares DB Agriculture Fund, formed over a year ago, is older than most in the niche. It has a low expense ratio of 0.75 percent but focuses only on corn, soybeans, sugar, and wheat.

For greater diversity, iPath Dow Jones AIG-Agriculture, an exchange traded note, tracks seven soft commodities, led by soybeans and corn.

ETF Securities has launched 29 ETFs covering exchanged traded commodities. Traded on the London Stock Exchange, they buy both hard and soft commodities, single and in baskets. Literally everything from aluminum to zinc with lean hogs in between.

Concentrated ETFs in soft commodities and a basket of soft commodities are among the group. The company also plans to soon add four more ETFs, including one for cocoa.

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