31/8/11 - DGC Asset Management

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For many years, institutional investors and ultra-high net worth individuals have been utilising the characteristics of agriculture investments as a key tool for portfolio diversification and hedging inflation, and it looks as though agricultural commodities have scored favour amongst investors, amid escalating fears for US crops and global inflation.

Analysis of regulatory data by Standard Chartered

reveals that institutional fund managers Money managers increased their stakes in US-traded commodity futures and options by 10 per cent in the week to August 23.

Investment in soybean futures was responsible for a large proportion of the rise in agriculture investments

, accounting for over half of the overall jump in demand.

There has also been a rise in the amount of capital flowing into exchange traded funds relating to the agricultural sector, with the largest capital inflow since May of $52 million for the week. The previous week witnessed an outflow of $14m.

Agriculture investments vs investing in gold

Fear of inflation has driven and further rounds of quantitative easing have led agricultural commodity futures to outperform shares, and energy, this month. Investors continue to view agriculture investments as an undervalued inflation hedge compared to gold which continues to reach all time high pricing. By comparison, investments within the agricultural sector seem excellent value.

Investors choosing to play the commodities markets are also placing bets on wheat prices as fears for US crops grow leading many to project a global shortfall and therefore the possibility of significant price rises in the short term. This is the first time in two months that speculators have bet on commodity prices rising, instead of falling which has been the recent trend.

As inflation continues to remain much higher than central bank targets, investors continue to seek effective hedges against the effects of inflation on cash, and agriculture investments display a strong positive correlation with inflation, and values of hard assets in the sector such as farmland have historically outperformed this key economic indicator by 2% per annum.

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