Eclectica says soft commodities to emulate oil rally

Date: Wednesday, October 17, 2007
Author: Dominic Lau, uk.reuters.com

ONDON (Reuters) - Soft commodities like corn and wheat, which have lagged behind the oil price rally, are set to boom, helped by a growing world population and rising income in developing countries, Eclectica Asset Management said.

"The softs have lagged well behind the boom in hard commodities," said George Lee, partner and equity analyst at Eclectica, which in June launched a fund investing in agricultural-related shares.

"I expect we will probably hit peaks in the commodity prices at some time in the next five years. History suggests that the re-investment and capex cycle lasts for as much as 10 years after the commodity prices have peaked. The peak for the equities will be many years down the line."

Eclectica were bullish across the whole soft commodity sector. Corn price would improve as acreage for next year is probably lower, while sugar, despite being bearish in the short-term, may pick up as supply is expected to wane, Lee said.

"Improving incomes in developing countries mean better diets in the form of higher protein consumptions," he said.

"Protein is an inefficient use of grain as it takes more than 1 kilogramme of grain to produce 1 kilogramme of protein, so if people upgrade from rice to steak then we need to produce even more grain."

Eclectica's Agricultural Fund has $90 million (44 million pounds) in assets.

Among Lee's top picks are farm equipment maker CNH Global (CNH.N: Quote, Profile, Research), irrigation equipment maker Lindsay Corp (LNN.N: Quote, Profile, Research), grain handler Viterra (VT.TO: Quote, Profile, Research) -- formerly known as Saskatchewan Wheat Pool -- and seed maker KWS Saat (KWSG.DE: Quote, Profile, Research).

Lee also said the sector was defensive against a global slowdown as world population remained on the rise and food inventories declined.

"If the rest of the economy is in recession across the world, your average industrial machinery company or construction company will see profits at least halve," he said.

"But most of my stocks will probably see earnings upgrades as farmers incomes are driven by a very different cycle from the world of industry."