Crop speculation by traders is back in the spotlight after food prices rose by an average of 6 per cent globally in July and critics argue speculation heaps further pressure on the world’s poorest people.
A number of European banks have bowed to pressure and have withdrawn products that enable investors to speculate on food prices after campaigners said these investment vehicles play a significant role in pushing up prices globally.
The recent rises in agricultural commodity prices have raised concerns about supply shocks, as well as the effect on food inflation around the world over the next 12 months.
“The worst drought since 1956 in the US has sent corn yields plunging and price soaring which has forced farmers across the US to make the choice between feeding their livestock at elevated prices, and slaughtering them, as they become too expensive to keep,” says Michael Hewson, senior market strategist at CMC Markets.
“While this has sent beef prices lower, the rise in prices has also illustrated how sensitive the food chain is around the world to even the slightest supply shock.“
There are still ways for small traders to speculate on crop prices without buying the assets directly – via spread bets. Spread betting firms routinely offer prices on a range of the leading agricultural commodities, including wheat, corn, sugar, coffee, cocoa, oats and soya produce. You can either spread bet on the commodity itself, or, in some cases, on the exchange-traded product linked to it.
But it is still a niche area for investors. “Soft commodities have never been a major market for Capital Spreads’ clients,” says Simon Denham, head of the firm. “While clients do tend to like ‘volatile’ instruments, the information flow is so opaque, and the consequent price action so violent, that investors have been rather put off.”
Mr Denham adds that in the past investors have generally needed a reason to be involved – for example, if they are a producer, supplier or broker – and have tended to “need deep pockets and nerves of steel”.
Agricultural commodities tend to cost more to spread bet, than, say, equities, warn experts. To trade corn, the difference between bid and offer prices could be several times that on the FTSE 100. And the spread for something less mainstream, such as oat prices, would be even wider.
But experts say shot-term traders can benefit from the continuing price fluctuations.
“Agricultural commodity products are likely to have wild swings as they become politicised coming into the November US elections,” says Joe Rundle, head of trading at ETX Capital.
“The increased headlines will draw in a new breed of speculator who has not traditionally traded agricultural products – ETX has seen a 200 per cent increase in trading in December wheat prices. The speculators will add to the volatility in the short term as they chase the market.”
So, what has been driving prices? Part of the problem surrounding food price volatility, says Mr Hewson, and something that will continue to be so, has in part been the scarcity of available arable land. When set against rising food needs, this is likely to make future price shocks “a fact of life,” he warns.
He argues that this will be compounded by the rise of a growing middle class in emerging market economies. “The growth in countries such as Brazil, India and China will probably see demand for these food staples rise in the coming years and governments will have to make hard decisions about how they meet the needs of their populations in a world that appears to be growing rapidly, while susceptible to ever-growing extreme weather conditions,” he notes.
Predictions vary widely among experts as to which way food prices will go. For those traders still keen to take a punt the question is, which way to bet.
Matt Weller, technical analyst at GFT Markets, says that with a growing global middle class and continuing demand from agricultural crops being used as biofuels, “the long-term trajectory for soft commodities appears set to remain upward”.
But he says much of these rises are linked to institutional speculators putting pressure on prices to rise. “As such, although it may to too early to call a top to this rally, it would seem foolish to imagine that the gains can be guaranteed from this point in,” he adds.
“In fact, long-term seasonality patterns suggest that many soft commodities tend to drop over the September and October period as the supply glut around harvest time hits the market.”
However, Mr Denham argues that the temporary run up in prices dues to the possible failure of this year’s US harvests will probably not have a long-term impact on prices because, in the end, the segments with the power in the food price chain “are the processors and supermarkets, not the farmers”.
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