Example portfolio: Agricultural raw materials

Example portfolio: Agricultural raw materials

08 January 2020 from Mikael Syding

Portfolio Strategy - Complement with ETPs

ETPs can be used as a complement to a portfolio to hedge a long-term position. In an article series, Anna Svahn and Karl-Mikael Syding will go through four examples of how you can use this type of instrument to boost your portfolio.

Leverage products can be used, among other things, on the following occasions:

- Short-term hedge or boost of existing long-term position in a particular event
- Before a planned news
- After an overreaction to a news item

Portfolio Strategy

For example, a short-term hedge in agricultural commodities can be used if you have a long-term long or short position based on where we are in the commodity cycle, but see a short-term position in the other direction and want to secure the portfolio or boost the position you already have.

Short-term cocoa hedge : example

Assume that we are early in a commodity bear market. The cacao prices have peaked for a long time and you have changed your positions from long to short. There is still a long downside and you think it will take many years before the trend reverses, but at the same time reports are being reported about the Ivory Coast where most of the cocoa is grown. You therefore take a short-term long position with the help of Vontobel Mini Future Long Cocoa to hedge your long-term position. If the price of cocoa rises due to the unrest in the area, I can use the profits to expand my long-term short position.

Current analysis of agricultural raw materials

Commodities are generally cheap at the moment, especially compared to equities. But that does not mean that it is wise to invest in every single commodity. Just as with shares, different commodities, although they happen to be in the same commodity group (comparable to sector / industry), are affected by different factors. 

Case 1: US Soybeans

The price of US Soybeans has been affected in recent years by the China-US trade war. China, which was previously the United States' largest buyer of soybeans, has reduced its US soybean imports by 80% on an annual basis since the trade war began. For American farmers, the effect has been devastating and stocks have grown from 438 million tonnes to over one billion tonnes. Raw material prices, like many others, are driven by supply and demand, and right now the imbalance is extreme as a result of the conflict between China and the United States.

In the short to medium term, the raw material still looks dark, although the downside is limited. Although there seems to be a solution between the two economic superpowers in view, two problems still remain; that one-third of China's pig population died in the sweats of North African swine flu, which means that even if the conflict is resolved, the great powers in the East still have lower demand than before. The second problem is spelled overfilled layers. It will be a long time before stock levels are normalized and we can even tell that the price may rise due to low stock levels.

Thus, in the short term, the situation for US Soybeans is negative, although the downside is limited as prices are already already pressed. For those who want to increase the risk in the portfolio, however, one can speculate on short-term price reactions as a result of an agreement.

Case 2: US Coffee

Coffee is another agricultural commodity that has had a tough time in recent years. Coffee, whose price is largely controlled by the Brazilian Real, has more than halved since the peak of 2011. The price is still trading below support levels despite the recent rise. What potentially suggests that the price may rise in the next 12 months is if the US dollar weakened, possibly as a result of future Fed interest rate cuts. 

Legal notice

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 capitalprotected, 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.

06/02/2023 01:50:13


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