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Best way to invest in food?

Investment | Commodities Helpful? 5

Asked by JOHNSM, submitted 07 January 2011.

Open Quote Happy New Year. Could you please advise what is the best way to invest in food commodities?End Quote

Answered by Justin on 10 January 2011

There are a few ways to invest in food crops (often called 'soft commodities'), depending on how much risk and hassle you're prepared to accept.

I think we can safely rule out buying crops themselves, as it's not easy buying a few tonnes of wheat then storing it in the hope the price rises. Far more practical to use futures contracts instead, as these allow you to buy or sell an agreed amount of crop at an agreed price on a specific future date. You don't ever have to own the crop as you can sell the future contact to someone else before the due date.

If you want to track a crop's price longer term you can simply roll-over the money from an expiring futures contract into another for the next period (e.g. month). Futures can be purchased via futures brokers.

Spread betting companies also offer access to soft commodities, allowing you to bet on movements in the futures price. The end result is pretty comparable to buying a futures contract - you put down an initial deposit and can end up making or losing a lot more than this initial stake.

A simpler (and arguably less risky) way of achieving a similar result is to buy an exchange traded commodity fund, like those offered by ETF Securities. These use futures to track crop prices and save you the bother of having to buy and sell crop futures yourself (plus you can't lose more than your initial investment). They'll charge around 0.5% a year in management fees, but could save you a lot of hassle, especially if you want to invest in a basket of different crops.

However, while the futures market tends to work well, there is a potential hiccup. When you roll-over money from an expiring future contract into a new one, the new purchase price is usually higher (other things being equal). This is called 'contango' and reflects the cost of storing the crop, insurance and financing etc. This is unlikely to cause a major problem re: soft commodity futures, but could reduce returns compared to the actual commodity price.

The alternative is to invest in the shares of companies that stand to benefit from rising food prices. These might include agricultural equipment, fertiliser and seed suppliers, as well as food producers themselves (e.g. Tate & Lyle and Associated British Foods).

The risk with this approach is that negative stockmarket sentiment and/or operational problems (think BP) could affect their share price regardless of underlying commodity prices. Plus it's less flexible as you can't bet on specific crops unless you can find a company whose sole business is that crop.

You can spread risk by using funds that invest in 'food' shares although these are currently thin on the ground. I only know of three such funds onshore - First State Global Agribusiness, Baring Global Agriculture and CF Eclectica Agriculture, although as they're fairly new it's still difficult to judge how capable the fund managers are.

Hope this gives you some pointers. If you want to keep things simple I'd consider a mix of exchange traded commodity and conventional agriculture funds.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (2) - To post a comment please register or login .

Comment by BernieB at 6:16pm on 10 Jan 2011:

One more fund is Sarasin AgriSar, another relatively new one, that invests worldwide all along the food production chain from land finance, land, water, to feeds, equipment and commodities and through to processing and retail. So not specifically food as such but everything involved in getting it to the consumer. Emerging markets, Europe and North America appear to be the main geographic locations at present.

Comment by justin at 10:24pm on 10 Jan 2011:

Thanks BernieB, forgot that one!