Agricultural commodities

While the subprime extravaganza and its turbulences unfold in the financial markets and the US move towards recession, it can be reassuring to invest in commodities supported by long-term powerful structural factors, agricultural commodities.

After a long and intense bear market lasting from 1980 to 2001 and characterised by oversupply and underinvestment in productive capacities, agricultural commodities are experiencing, since 2001, a revival in terms of public interest and performances - and rightly so.

Soft commodities, and especially 'breakfast commodities' (wheat, sugar, coffee, cocoa and orange juice) benefit from at least four major structural trends for the years to come: rising world population, rising consumer market and living standards, development of the biofuel industry creating competition for arable land, and water scarcity.

The rising world population is maybe the most obvious of these supporting factors. According to the last figures from the United Nations, the world population will grow from 6.5 billion people in 2005 to 7.7 billion people by 2020 and 9.1 billion people by 2050, with most of this increase coming from Asia.

This has to translate into increased consumption of commodities in general, and especially agriculture commodities as growing Asian populations shift towards more internal consumption.

Indeed, with rising population comes rising consumer market and living standards, as put by the United Nations: "China and India have a combined population of 2.4 billion people, about 37 per cent of the world's population. Thus, a US$ 100 increase in the per capita income of these two countries represents US$ 240 billion in additional demand."

Some recent studies even go to forecast that China and India will become the third and fifth largest consumer markets by 2025 respectively. In India alone, income and spending levels will triple from 2006 to 2025.

The development of the biofuel production should also provide support to soft commodity prices. The support is direct for sugar prices as it is one of the main raw materials used to produce ethanol. But the rapid expansion of ethanol and biodiesel productions worldwide leads also to competition for arable land and should eventually support prices of wheat, for example.

Finally, water scarcity should also support soft commodity prices. The usable fresh water represents only 0.002 per cent of the global water supply on the globe and over the last 50 years the water usage (for industry, agriculture and household consumption) has tripled.

Amazingly it takes a thousand tonnes of water to produce only one tonne of grain and consequently wheat is quickly acquiring the status of "virtual water".

This will eventually limit the production of some soft commodities: another constraint which, ultimately, can only be resolved by higher prices for soft commodities.

Mr Caruba is on the staff of BNP Paribas (Commodity Investor Derivatives).