Agribusiness is set to enjoy sustained growth with sugar alone seeing demand rise by as much as 50% in the next 20 years, according to industry experts.
A report from ETF Securities on themes in agribusiness suggests that growth in food production has been insufficient to match rising levels of demand in the medium term. The review concludes that higher prices in agricultural commodities provide a clear signal that further investment in agribusiness productive capacity is needed.
Meanwhile, the Chinese National Bureau of Statistics said recently that surging food prices had contributed 74% of the country's year-on-year inflation, despite constituting only a third of the basket of goods used to calculate CPI.
Food prices have trended higher and with greater volatility since 2003; within that, sugar prices hit record highs of $39.65 on 11 November.
Sugar supply tightening has been exacerbated by infrastructure bottlenecks in Brazil and heavy rains in India delaying harvests. According to ETF Securities senior analyst Daniel Wills, sugar now has an even more extreme inventory rundown than in the commodities boom of 2007-08.
Alongside adverse weather patterns, what makes insufficient sugar supply look like a lasting theme is a fundamental shift in global food demand.
In October, renowned sugar trader Czarnikow published a report entitled Sugar in 2030: How the World will Meet an Extra 50% Demand.
While European consumption is expected to remain stable, Czarnikow anticipates India's consumption doubling by 2030 and Chinese consumption overtaking that of the EU by 2014.
Gemini Investment Management managing director Stuart Alexander says that a growing middle class demographic in emerging markets such as China and India has increased demand for processed foods with a high sugar content.
Wills agrees: "Sugar is a proportionally large beneficiary of changing consumption tastes."
Alexander says he definitely expects this trend to continue, and advises investment in firms that benefit from increased demand for sugar.
He points to the recent success of Nestle India, which produces a range of processed foods and posted a domestic sales growth of nearly 28% at the end of the third quarter this year.
As rising sugar prices squeeze food producers' margins though, investors may seek more direct access to the commodity.
Sugar's low price to weight ratio - as well as its being perishable - makes the creation of a physically-backed investment opportunity unfeasible, but there are a number of products using near-dated futures contracts to provide exposure to sugar spot prices.
Investors can choose from a Barclays iPath ETN, as well as the Sugar, Short Sugar and Leveraged Sugar ETCs offered by ETF Securities.
The Dow Jones-UBS Sugar Subindex Total Return, used as the underlying for all these products, has seen returns of nearly 100% over the past 6 months. This figure does tail off in both the short and long term though; year-to-date returns stand at just over 6% while the index dropped 5.38% in November.
In the long term, there is a strong potential for sugar prices to be impacted by the production of biofuels. Wills points to the example of corn in the ethanol market. The American Congressional Budget Office estimates that global biofuel production may account for 40% of the rise in corn prices between 2000 and 2007.
According to ETF Securities, ethanol now accounts for approximately one-third of annual corn output in the US. Depending on how export restrictions between Brazil and the US play out, a similar development in sugar may squeeze supply and drive prices even further up.
Interestingly, Deutsche Bank's latest report on the European ETP market shows that while agriculture ETP assets under management (AUM) have increased 9.4% so far this year, the products themselves have seen negative net cash flows, losing €388m. Sugar has lost €3m in AUM against much greater cash outflows of €26m.
These patterns suggest that investors are taking money out of agricultural ETPs even as the products produce favourable returns.
This is a trend the ETFS research supports, reporting that sugar ETC investors have recently been taking profit on positions built up in 2009. The momentum in futures positioning, though, is building almost to the level of the commodities boom, hinting at the mood of investors.
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