Food prices are soaring. How can investors get a piece of the action?
A week ago I pondered whether any safe havens still existed for ‘buy and hold' investors as shares stuttered and property prices plunged in the Anglo-Saxon world.
And I suggested looking at the London Stock Exchange-listed range of Exchange Traded Funds (ETFs) as a way of cashing in on, for example, climbing commodity prices.
In this follow-up, there's more about ETFs, specifically those likely to be the big beneficiaries from soaring food costs.
In a nutshell, here was the view...
With the toxic waste of American negative equity spreading around the international banking system, global markets have become disillusioned about the concept of the rest of the world ‘de-coupling' from United States. In other words, some market players believe that if the US suffers, China and India will suffer too.
But I disagree. Domestic demand in leading emerging economies has accelerated since 2002 into generating 90% of total global annual output growth, establishing those countries' stand-alone capacity.
The downside has been over-rapid price rises. So to restrain economic growth at a non-inflationary level, the relevant financial authorities now need to hike interest rates.
Net result: emerging economies' currencies will be allowed to appreciate while commodity prices will keep rising, even if less dramatically than recently. So, in my view, emerging markets and commodities seem a much safer long-term bet than either the UK or the US.
One relatively cheap way for investors to buy into either whole geographic areas, or even individual commodities, is the London Stock Exchange-listed range of Exchange Traded Funds.
An ETF is an
investment vehicle based on either recognised or created indices, with the following advantages:
• Can be bought, or sold, just as easily as ordinary shares
• Does not attract stamp duty
• Has the lowest annual fee (0.49% per annum) of all collective investment schemes
• Is eligible for ISA inclusion
If you want to find out more about the range of available ETFs, here's the link to the London Stock Exchange site.
Last time, I mentioned the first ETF to offer access to all of Latin America, the DB MSCI Latin America
(LSE: XMLA)
which was launched in September 2007. But this isn't just a play on currency appreciation, it buys stock market exposure as well.
And while there's quite a good case for Latin American shares - the region produces what the world seems to want most, namely food and energy - there's also a risk that the combination of interest and exchange rate rises I described earlier could curb both profit growth and valuation multiples.
So it may be better to look at purer food price ‘plays'.
Here two funds stand out, designed to enable investors to invest in the commodity market without having to take delivery of physical commodities or needing to get involved in the arcane world of futures contracts.
Both funds are denominated in sterling, so not only do UK investors gain from a falling pound, they don't have to worry about sorting out any currency transactions.
The ETFS Agriculture DJ-AIGCISM
(LSE: AGAP)
is an open-ended fund -- i.e. more shares can be created should demand rise -- which tracks the DJ-AIG Agriculture Total Return Sub-Index, though without the fees. The index constituents are: soybeans (26%), corn (19%), wheat (16%), coffee (10%), cotton (10%), sugar (10%) and soybean oil (9%).
The ETFS Grains DJ-AIGCISM
(LSE: AGGP)
is more targeted. It's also an open-ended vehicle, in this case designed to track the DJ-AIG Grain Total Return Sub-Index, again minus fees. Index constituents: soybeans (43%), corn (31%) and wheat (26%).
Ok, both have proved stellar performers over the last year. And the names are a bit of a mouthful in themselves.
But following the worst Australian drought on record, global wheat stocks have slumped to their lowest levels since 1979. If you believe, as I do, that the long-term trend in wheat and other cereal prices will be a continuation of the recent upward path, this latter fund in particular could be the one for you.
More: Profit From The Falling Pound | Four Ways To Profit From A Soft Commodity Bull Market
You can buy shares in any ETF simply and cheaply via The Motley Fool Share Dealing Service.
