MILTON Friedman said that there is no such thing as a free lunch, but even he might have been surprised by the cost of a meal today. World food prices have soared back up to levels last seen in the crisis of 2007-2008, leading some to warn of renewed food riots. Russia recently extended its export ban on grain, while in July, one hedge fund even took physical delivery of £650m of cocoa. Spread betters should take note.
Recently, a combination of restricted supply and buoyant demand has driven increases in the prices of most “soft” agricultural commodities, from soybeans to pork bellies. Bad harvests in Australia and Russia have depressed grain supply just as Chinese demand has exploded. China’s wheat imports have doubled over the last year, while corn imports have increased by an astonishing 7,043 per cent. Overall, the S&P GCSI agricultural commodity index has risen by 18 per cent over the last quarter.
And the rally is expected to continue. Emmanuel Jayet, an analyst at Societe Generale, says: “This is no overreaction – we should see more tightening in the short run”, while demand is likely to keep growing. According to Jayet, prices are unlikely to moderate until at least April, when information about next year’s harvests is more readily available. Before then, there should be ample opportunity for spread betters to make a profit.
Not all commodities are equal, however. Jayet warns that the prices of sugar and wheat do not usually move in step, and the fact they have done so recently is arguably coincidental. Speculative demand for agricultural commodities is relatively limited, and so price changes tend to be driven mostly by the fundamentals. Since those differ between products, spread betters need to keep on eye on individual commodities.
For example, whereas wheat prices should keep rising, sugar prices may yet fall. Much depends on a political decision: Indian sugar production is expected to rise, but with food inflation a hot political issue in India, it is unclear whether exports will be allowed to increase.
According to Sudakshina Unnikrishnan, an analyst at Barclays Capital, an large expansion of Indian supply is unlikely, and so prices are likely to be pushed higher. It would seem wise then for spread betters to take a long view. IG Index offers several spreads on commodities, on both the London and US markets.
For all that though, some commodities may never be tradeable. Last month, one US regulator sent out a (joke) email suggesting that several agricultural products be classed as “abhorrent” to the American people, and so illegal to be traded. The list included Brussels sprouts and cauliflower.
Champion Trader - Week 1
After the first week of trading which closed at 5.30 pm on Friday we have found our first weekly leader "fivericket". This trader achieved a massive 910 per cent increase on the original account value of £10,000.
The key trade was making £69,000 on a single US crude oil trade, fivericket called it perfectly from the bottom on Tuesday to the top on Thursday selling at $86. The trader backed up his key trade with another 23 trades with a 70 per cent win rate.
Don’t worry you can still enter and it’s free with a £9,000 prize pot still up for grabs.