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Potential shortages seen across commodity sector

Mar 23, 2011 08:30 AM

Analysts expect to see shortages of a wide variety of commodities in the next year - and investors are pricing in the possible gaps between supply and demand.

Barclays Capital's latest survey of major investors - conducted as the crises in Japan and the Middle East were peaking - found that there was strong sentiment backing commodity futures investing.

Fully 83 percent of the survey respondents told Barclays they will hold steady or boost their commodity investments in the next year, and 90 percent think they'll get returns of at least 6 percent on those assets. In addition, 75 percent believed that more than 6 percent of a balanced investment portfolio should include commodity futures or other commodity-tied assets.

"Commodities are now mainstream as an asset class with institutional investors being very knowledgeable," said Martin Woodhams, the head of commodity investor structuring and institutional investor sales at Barclays Capital. "Not surprisingly, they now want to pick and choose between strategies to achieve their returns. This is why active strategies have become so popular."

A lot of focus has centered on the possibilities of precious metals in the past year, particularly gold futures and silver futures. However, some of the strongest performers of 2010 were in the agricultural sector - cotton futures had a world-beating year - and with the chaos in the Middle East, energy futures have a lot of momentum behind them as well.

"The booming economies of China and India will continue to drive strong demand growth for most commodities over the next ten years," according to Martin Norrish , the managing director of Barclays Capital's commodity research division. "As a consequence, the price outlook for those commodities where physical supply is struggling to keep up like oil, coal and copper is very good. Geopolitics will also drive volatility in the energy markets and will be a key factor in driving returns in oil."

The Financial Times reports that the premium paid by European refineries for light crude oil with a low sulfur content (often called light, sweet crude) has surged as high as $2.85 a barrel over the Brent crude benchmark. Of course, this is directly tied to political unrest in Libya, which holds Africa's largest oil fields. Almost all of Libya's oil was light, sweet crude, and the effective shutdown of the Libyan oil industry means that European refiners have had to turn to Nigeria and other suppliers.

Oil volatility and price gains feeds directly through into the heavily petroleum-dependent world of modern agriculture, pushing up grain prices. Unusually complex and volatile weather conditions have also played a role, from the searing heat and wildfires that destroyed so much of the Russian and Ukrainian wheat crop, to the floods that wiped out a vast swathe of Pakistan's arable land and devastated the economy.

Demand is also growing at fast clip - China, especially, is consuming an ever-larger portion of the world's raw materials. It has a massive population, a rapidly growing middle class developing a taste for new luxuries and a cadre of super-rich businessmen and women with a love of luxury. 

The Middle Kingdom's corn imports could set a record in the next year, the FT reports. The US Grain Council said that imports could reach 9 million tons in 2011-2012, after just 1.3 million tons were imported in 2010-2011.

That would have a massive impact on the corn futures market, which would likely also filter through to wheat futures and soybean futures, which tend to follow each other to some degree as mills, animal farmers and consumers buy one grain to offset the rising price of another.

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