Lessons in playing soft commodities volatility

Stefan Meinhold of DWS Investments says various factors could fuel ongoing volatility in raw materials – so better to diversify in agribusiness shares.

Historically, low reserves of global commodities make high volatility likely in physical markets and the shares of companies closely tied to them, says fund manager DWS Investments. And meagre storage provides little ‘buffer’ in case of supply shocks, such as bad weather.

Current levels of warehoused grain and oilseed are enough to feed the world for less than three months, based on current consumption and no new supply. One of the three lowest dips in storage since the 1970s, it makes prices vulnerable to supply shocks, says Stefan Meinhold (pictured), senior product specialist at the German fund manager.

He adds that funds focused only on physical commodities or on the shares of companies most closely linked to them – farm machinery manufacturers and fertiliser ­producers, for example – would also be volatile in case of shocks.

Global grain storage levels have fallen since peaking at almost four months’ capacity at the turn of the century. With the exception of lower reserves in 2006-07 and 2002-03, capacity has not been this tight since 1976-77.

“That means whenever we have supply shocks – for example, drought in Russia – you would see extreme reactions in prices, so we will see in future continued high volatility of the underlying,” says Meinhold.

DWS’s $3.5bn Agribusiness Ucits fund, the sector’s oldest established in November 2006, consciously invests in a wide range of c­ompanies –between 80 and 100 – linked in various ways to commodities.

They range from farm machinery and fertiliser producers – which DWS terms ‘upstream’ – to ‘downstream’ food producers and supermarkets. The fund has a correlation of 0.4 to soft commodities, and 0.7 to the MSCI World Index since launch, and has made 19.4% versus a 0.5% loss from MSCI World in euros.

It has avoided being involved directly in soft markets, where ­allegations of profit-driven ­speculation raising food prices have damaged reputations. DWS also shuns derivatives markets for commodities because they are typically in contango – meaning traders typically pay more to roll into the next forward futures contract.

This situation has diminished overall gains for physical investors to such an extent that, over the past 15 years, taking such a route would have made a loss.

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