Worried by strong inflation and high levels of market volatility, investors are seeking new opportunities that can benefit from the current macroeconomic conditions.

Institutional investors have moved to soft commodities in the past year to take advantage of the sector’s low correlation with bonds and equities and the assets’ tendency to generate good returns during inflationary periods.

This strength has already been showcased by gains in the hard commodities segment, where prices for things like copper and nickel reached record highs earlier this year.

But so-called ‘soft’ commodities – agricultural goods like grains – have also started to move in the past six months, underpinned by the ongoing conflict in Ukraine (where Russian battleships have blockaded key ports) and hastened along by adverse weather across South America and the US and a shortage of key fertilisers.

These grown commodities have seen their prices rise at their fastest rate since 2008, with investors hoping to capitalise on the rapid price gains these assets have recorded as supply chains struggle to keep pace with global demand.,

Join us tomorrow, Thursday 2nd June at 1pm (AEST), for a live investor briefing where we will delve into the investment opportunities within the possible supercycle that experts believe is near. Learn about a unique wholesale investment product with the potential to capitalise on the market value of soft commodities touted to drive the performance of this supercycle. Click here to register.

Institutional capital rushes into commodities

In the year ending 10th May, US$38.7 billion of institutional capital flowed into investment vehicles with exposure to raw materials, notably wheat and oil.

The deluge of money came from investors looking to hedge against surging inflation and capitalise on the gains made by energy and grain prices, which have been driven by a range of different factors.

Chief among these drivers has been the breakdown of global supply chains after the COVID pandemic and its associated lockdowns left ports jammed up, cargo capacity becoming more costly and emergency shipments being relied upon to fill short-term gaps.

Russia’s invasion of Ukraine has exacerbated these challenges, with blockades and sanctions placed on the two countries – both major global grain suppliers – adding further pressure to already strained supply networks.

Elsewhere in the world, farmers are battling against bad weather conditions and a global shortage of fertilisers, which have weighed on crop capacity and further escalated costs. 

Against this backdrop, the United Nations Food and Agriculture Organization (FAO) food price index broke to new highs in February after rising at its fastest rate since the Global Financial Crisis rocked markets in 2008.

Source: World Economic Forum

These issues are not expected to abate in the short-term, and some countries have adopted protectionist policies to guard against potential food security issues.

India banned exports of wheat in early May after a heatwave stifled production and jeopardised the country’s capacity to feed its 1.4 billion citizens, despite the pleas and protestations of International Monetary Fund leaders who warned the ban would have consequences for global food security.

Indonesia, Argentina, Bulgaria, Hungary, Serbia and Moldova have also all implemented similar strategies,, with these export bans contributing to further price gains.

If you would like to know more about this wholesale opportunity, register for our live investor briefing tomorrow at 1pm (AEST). Book your spot here.

Soft commodities tipped to keep gaining

In a note earlier this year, the World Bank cautioned these market forces have created the biggest commodity supply shock in decades and warned prices still have room to gain – the organisation said elevated prices will likely persist through 2024.

This would mirror past periods where prices for key crops (notably wheat, corn and soybeans) have soared off the back of larger macroeconomic, geopolitical and weather-based trends.

In the 1970s and 1990s, changes in market supply and demand dynamics, coupled with inclement weather in the US, led to multi-year periods of elevated grain prices.

With rising rates now undermining bonds and equity markets getting outpaced by commodities, investors are now increasing their exposure to these agricultural assets as a potential hedge against further weakness.

Soft commodities are popular under these conditions because they are one of very few assets that typically benefit from inflation.

But they offer other benefits as a diversifier for portfolios, too. Since 1970, the prices of commodities have borne very little correlation to US equities, and almost no correlation to bonds at all.

Instead, the prices paid for these goods are driven more by fundamental supply factors such as the weather or geopolitical tensions.

Capitalising on commodities 

Reach has access to a wholesale investment that provides exposure to the S&P GSCI Agriculture ER Index, which is designed to benefit from continued increases in soft commodity prices over the next two years.

Investors gain long exposure to a basket of eight commodities, with a significant weighting towards corn, soybeans and wheat. This product is 100% leveraged through a limited recourse loan, giving investors $100,000 exposure to the index for an initial investment of $18,550, as an example.

This means investors have capped downside risk with the potential to receive an uncapped performance coupon at maturity.

This is a wholesale opportunity for investors who believe agricultural commodity prices will remain elevated to diversify their portfolios with exposure to assets that have a low correlation to equity and bond market movements.

Click here to book your spot to find out more about this wholesale investment opportunity tomorrow, Thursday 2nd June at 1pm (AEST). Or to request the Information Memorandum, please click here.

Reach Markets are the advisors assisting with the management of this offer and may receive fees depending on whether an offer is taken up by investors.

Sources:

• WSJ, Breaking Russia’s Ukrainian Grain Blockade
• ecb.europa.eu, Foreword
• Rabobank, RaboResearch Agribusiness Monthly
• Investopedia, Commodities: The Portfolio Hedge
• Farm Policy News, Iowa Farmers Dealing With Late Planting, Higher Input Costs, While Elevated Food Costs Put Focus on China
• The Sydney Morning Herald, Soaring prices for raw materials threaten acceleration of electric car sales
• Investopedia, Soft Commodity
• Pimco, What are Commodities?
• USDA, Agricultural Commodity Price Spikes in the 1970s and 1990s: Valuable Lessons for Today
• JWN, World Bank forecasts elevated commodity prices to remain through end of 2024
• Financial Times, Food protectionism fuels global inflation and hunger
• Seeking Alpha, Food protectionism in play as countries raise export barriers
• Financial Times, Commodity funds stage revival as investors seek inflation hedges
• Mining.com, Nickel price back to where it started before March chaos
• Bloomberg, Food Security Panics Governments as Ukraine War Blocks Supplies
• NDTV, “Beg India To Reconsider Wheat Export Ban As Soon As Possible”: IMF Chief
• World Economic Forum, 2 charts that show the sharp rise in food prices
• The Conversation, Ukraine: how the global fertiliser shortage is going to affect food
• McKinsey & Company, Supply chains: To build resilience, manage proactively
• The World Bank, Food and Energy Price Shocks from Ukraine War Could Last for Years
• S&P Global, South American drought likely to fuel US soybean demand in 2022
• Reuters, Commodities in ‘perfect storm’ says ERG, as crisis starts super cycle
• The Wall Street Journal, Rising Inflation and War in Ukraine Push Investors Into Commodity ETFs