Investing in agriculture, with protection

I recall an article that you wrote about soft commodities such as wheat and soybeans in June and how the present bull market in these commodities is set to continue. I am wary that this involves risks despite the huge potential growth. With this in mind, are there investment funds that invest in this sector that also provide a protection on investors' capital?

Surging demand from China and other emerging countries has led the price of grains to very high levels this year, with the upward trend set to continue for years to come. Don't forget that there is also a global demand for sugar, corn and soybeans in the use of alternative fuels. In inflation terms, the price of most grains is still 80 per cent lower than 30 years ago. If prices were to double in the next five years, they would still be only equivalent to half their historic average.

While you can invest in the price of individual commodities like sugar, cotton and coffee, you can also select groups of commodities, thereby reducing your risk. For example, you can invest in an agriculture basket of corn, sugar, wheat and soybeans. Alternatively you can opt for a grains basket of the same, less sugar.

As regards the performance of these baskets, over the last six months the grains basket has risen 32 per cent and the agriculture basket 24 per cent. The star performer has been wheat; it has risen an incredible 101 per cent for the six months ending September 30.

People seeking an element of protection can invest in a product that typically runs for five years which invests equally across the four agriculture prices. The 100 per cent protection of your capital is provided on maturity and should be from a bank of a strong credit rating of A or AA.

Interestingly, the best products offer 100 per cent of the growth of the commodity basket or better. Some even offer 105 to 110 per cent of the growth. In addition, such products carry no initial charges so 100 per cent of your capital is invested.

In summary, if you believe that wheat prices, etc, will continue to rise over the next five years but you wish to protect your capital at maturity, then this is a very good way of gaining exposure, especially as you will receive at least 100 per cent of the growth of the commodity basket. Investments can typically be made from €20,000 or sterling equivalent.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.

Mark Hollingsworth is the director of Hollingsworth International Financial Services Ltd, licensed by the MFSA to provide investment services under the Investment Services Act 1994 and enrolled insurance broker under article 13 of the Insurance Intermediaries Act (Registration No. C32457). Tel: 2131-6298; e-mail: mh@hollingsworth-int.com; www.hollingsworth.eu.com.