Over the last month, countries such as Thailand and Pakistan have suffered major flooding, which has had a devastating effect on their crops. As a result, the value of agricultural commodities looks set to be on the up over the next quarter.
As demand for meat has increased, so has the consumption of grain used in livestock feed, which has also contributed to rising wheat prices. Production of wheat is also set to decrease this year in the US, which is the world’s largest exporter of the crop. After a 23 per cent drop in September, wheat gained 8.1 per cent in October – indicating signs of a recovery.
Performance of index over 1-yr
Source: FE Analytics
Demand for other agricultural commodities such as rice also looks set to increase due to massive damages sustained to crops in Thailand. With the country being the world’s number one producer and exporter of the grain, supply will take a definite hit.
Flooding in Pakistan has also resulted in the destruction of crops. With livestock the main concern due to a lack of feed, demand within the country itself will rise.
Investors should look to take advantage of the current situation by either investing in agricultural ETFs or structured products that have grains as their underlying holdings, as they can also offer a degree of downside protection in such volatile markets.
Structured products are available by banks such as Citibank, RBC, Morgan Stanley, Commerzbank and Nomura to name a few – and they generally structure notes to be observed quarterly and have an auto-callable feature attached. Returns in such notes can be as lucrative as 5 per cent per quarter and totaling 20 per cent per annum. With a 50 per cent downside European protection barrier, they make an enticing opportunity for the more cautious investor, as well as those who can stomach the high levels of volatility in commodity markets. One should also note that notes generally come with a five-year term and require a minimum investment of $50,000.
Agricultural commodities will certainly be ones to watch in the closing quarter as prices, along with demand, are expected to rise, so quick returns on the investment can be expected – and alternative asset classes such as ETFs and structured notes look poised to take advantage of such gains.
Abhishek Madarasmi & Harpreet Sajjan are portfolio managers at Platinum Financial Services. The views expressed here are their own.