The price increase of agricultual products could open up opportunties for investors
Rising agricultural prices are devastating developing countries in particular. According to Bloomberg reports, food prices rose in February for the ninth month in a row, making the rise the longest since 2008, when two food crises were experienced in a short time.
Rising agricultural prices are devastating developing countries in particular. According to Bloomberg reports, food prices rose in February for the ninth month in a row, making the rise the longest since 2008, when two food crises were experienced in a short time.
In February, prices rose from sugar to vegetable oils, raising food prices to six-year highs.
Raw material prices are rising as China buys huge quantities of crops, unstable weather threatens the fields and the supply of dairy products, for example, is falling.
The worst affected are low-income, import-dependent countries. The FAO (Food and Agriculture Organization) reports that the import needs of grains in poor countries will be higher than average in 2020-21.
Global food prices are still below 2011 highs. Production difficulties are easing and wheat production is forecast to reach a record level of 780 million tonnes next season and maize production in Latin America is expected to be better than average.
The rise in the price of meat and dairy products has attracted media attention since the beginning of the year, but recent increases in the prices of palm and soybean oil in particular have raised eyebrows. The price of palm oil will rise 10 percent this year and the price of soybean oil has bounced around 30 percent.
Food prices across the lines are on the rise, although this is not yet reflected in the inflation figures published by developed countries.
Soybeans and wheat are among the most important agricultural commodities. In the following, we will review their market situation, those that affect their prices and how they can be traded in Finland.
Soybeans and their trading
Soybeans are a crop from which the oil in the seeds is separated. Other similar crops include rapeseed, sunflowers and flax. Of these, only soybeans have an interesting trading market available to investors.
Last year’s total was soy harvest estimated by the USDA to be about 336 million tons. Brazil has become the world’s largest soybean producer with a crop of 126 million tons, the US is a close second with a crop of 124 million tons.
Soy is traded globally and is especially used as a natural food in Asia. China is the world's largest importer of soybeans, with the European Union ranked second.
In addition to rice and wheat, soy is one of the most cultivated plants in the world. The oil made from soybeans is the most common vegetable oil in the world. 83 percent of the annual soybean harvest is used to produce soybean oil and animal feed. Soy is also used as a meat substitute in people’s diets.
The above factors make soy an interesting trading market.
The main market for soy is futures, which are dominated by soy manufacturers and marketers.
The soybean market follows a fixed cycle consisting of sowing to harvest.
Soybean prices have started to rise sharply during the Covid-19 pandemic.
As with all raw materials, the price of soy is affected by supply and demand.
Other factors affecting the price of soybean futures are:
- US and Brazilian production: The USA and Brazil are the two largest producers and exporters of soybeans. Variation in production due to weather phenomena such as hurricanes and droughts can affect production and thus limit the amount of soybeans available globally.
- Dollar strength: Like other commodities, the price of soybeans is quoted in U.S. dollars. When the dollar is weak, producers earn less and more in nominal terms when the dollar is weak.
- Demand from developing countries: In addition to China, developing countries such as India and South Africa are importing more soy to meet the rising demand of a growing population. A demand shock can affect the price of soybeans if production does not rise to meet demand.
- Alternative oils: Soybean oil competes with, for example, rapeseed and canola oil in the same market. An increase in demand for these oils can affect the demand for soybean oil and thus the price.
- Subsidies: To increase ethanol production, the U.S. government is supporting corn growers. If these subsidies run out, farmers may decide to grow soy instead of corn. This would increase supply and lower the price of soy.
In Finland, Vontobel's BULL and BEAR certificates can be used to take advantage of the price fluctuations of soybean futures.
If you believe in rising soybean futures prices, Vontobel's BULL SOIJA X4 V-certificate offers a possibility for profit opportunities. The value of the certificate will increase by 4% as the price of soybean futures increases by 1%. When the price of soybean futures decreases by one percent, the value of the certificate decreases by four percent, respectively. In other words, the BULL SOIJA X4 V offers a 4x leverage for intraday movements of soybean futures and can be traded on the stock exchange just like stocks.
Bull & Bear-Certificates
If you believe the price of soybean futures will fall, you can aim for a return with Vontobel's BEAR SOIJA X2 V certificate. Its value will increase by 2% while the price of soybean futures will decrease by 1%. If the price of soybean futures rises by one percent, the loss of the certificate will be two percent.
Bull & Bear-Certificates
In addition to these products, Vontobel offers BULL and BEAR certificates for soybean futures with many different leverage factors.
Trading wheat
Investing in agricultural products, such as wheat, is often seen as a good long-term investment, as everyone needs to eat. Most food comes from farms, so agricultural commodities are part of the backbone of the economy and the price of wheat plays an important role in the market.
What makes wheat interesting compared to other grains is its durability in demanding conditions. Wheat can also be harvested in a relatively short time.
As developing countries feed their growing populations, global grain production has increased in recent years. At the same time, meat consumption increases as people get richer, which increases the consumption of wheat as animal feed.
Unlike, for example, cocoa, the production of which is dominated by Côte d’Ivoire, wheat production is not dominated by any country alone.
Last year, China was the world’s largest wheat producer with 134,250 kt. The top five in the order were India, Russia, the USA and Canada.
Like soybeans, the most active trading market for wheat is the US futures market.
The price of wheat has been rising in recent years, but the pandemic also gave additional impetus to wheat prices.
Note: Historical returns are not a reliable indicator of future returns.
What factors affect the price of wheat in addition to the US dollar exchange rate?
- Energy costs: A more expensive price of energy means higher costs for production and transportation. Energy accounts for a significant share of crop costs. This is especially true when it comes to fertilization, as the production of fertilizer consumes a lot of energy in the form of natural gas. In U.S. wheat production, energy and fertilizers account for more than half of the cost of the harvest.
- Rising income levels: As incomes rise, wheat consumption will increase, especially in developing countries, where caloric consumption reacts more strongly to income growth. As incomes increase, people eat more meat instead of grain, which drives grain consumption to raise livestock. About 15-20 percent of wheat production ends up in animal feed.
- Weather: As with soybeans and other grain products, weather is a major factor in production. Improper weather, for example during the sowing phase, can significantly affect the production cycle and thus negatively affect production.
- Substitutes: Wheat has many substitutes among cereals. For example, an increase in the price of corn could lead to an increase in the price of wheat. If the price of corn rises too high, farmers can switch their crops from wheat to corn, reducing wheat production. At the same time, consumers can shift their consumption in another direction, raising demand compared to cheap wheat.
- Stock levels: Stocks provide a buffer for both wheat producers and consumers. Depletion of stocks usually occurs as demand grows faster than supply, leading to higher wheat prices. Falling inventory levels could expose wheat to production shocks or a sudden rise in demand.
- Government intervention: As wheat is one of the main sources of food, the state in both developed and developing countries may limit the supply of wheat. The purpose of the restriction is to protect farmers or consumers, or both.
- Speculation: As food prices rose in 2010-2012, attention turned to speculative traders who were believed to have pushed up prices for wheat and other agricultural commodities. No watertight proof was found for the theory, but speculative traders are an important part of the efficiency of futures markets, giving signals of future shortages or taking risks away from farmers who want to protect their production.
- Transportation: High transport costs, uncertainty and poor logistics can affect wheat production even if the harvest has been good.
Like soybeans, the investor has an opportunity to profit from the development of wheat futures prices with Vontobel certificates.
The BULL VEHN X5 V2 certificate enables the pursuit of a return on the rising prices of wheat futures. If the price of wheat futures increases by 1% during the day, the price of that certificate shall increase by 5%. Correspondingly, if the price of the underlying asset decreases by one percent, the certificate yields a five percent loss.
The value of the BEAR VEHN X5 V1 certificate will increase by 5% as the price of wheat futures decreases by 1% during the day. If the price of wheat futures rises contrary to investor expectations, the value of that certificate will fall by 5%.
Risks
This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.
The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.