Sugar, corn, wheat and cotton may be among the best commodity investments in the next one to three years driven by biofuel demand and rising incomes in China and India, according to UBS AG, the world's largest money manager.
``Investors can expect to see a 6 to 10 percent plus return per year on those investments,'' Stuart Fox, UBS's head of commodities in Asia Pacific, said by phone from Hong Kong. His energy and commodities traders and sales team in Asia has more than tripled to 16 people in the past 12 months.
UBS, Credit Suisse Group and Lehman Brothers Holdings Inc.are among banks expanding into commodities after prices rose to records. Cereal, oil seed and sugar prices will stay close toc urrent levels over the next decade because of surging demand from biofuel producers, the Organization for Economic Co-operation and a United Nations' agency said on July 4.
'' Tim Rocks, Asian equities analyst at Macquarie Securities Ltd. The general outlook for agricultural commodities is very positive, said by phone from Hong Kong yesterday.``Vegetable oil prices are going to go a lot higher. There's no shortage of demand.''
Agricultural prices may double in two years on rising populations in Asia and demand for alternative fuels, Global Commodities Ltd. said last month. Ethanol production from cornis forecast to double between 2006 and 2016 in the U.S., theParis-based OECD and the Food and Agriculture Organization said.The output of biodiesel made from oilseeds in Europe and ethanolfrom sugar in Brazil will also soar, they said.
``We are very bullish on the agricultural complex mediumterm and we think that is one area people are under-invested and there is a lot of upside,'' UBS's Fox said in a July 4 interview.``Real demand from China and India is not going away.''
Investors held $110 billion in commodity products in thef irst quarter and investments may rise 20 percent annually overthe next three years, according to American International GroupInc. Jim Rogers, chairman of New York-based Beeland InterestsInc., said this month the bull market in commodities will lastat least a decade, and favored agricultural commodities.
``For institutional investors that are looking at one to three years horizon, we think corn, wheat, sugar and cotton are good buys over that time frame,'' Fox said. ``They are a great inflation hedge'' and ``very few investors have exposure tothese markets,'' he said.
The price of wheat has gained by 55 percent in the past 12 months as drought cut output from Australia to Ukraine andinventories fell. Corn has rallied 40 percent, driven by demandfor ethanol. This compares with a 9 percent decline in theReuters/Jefferies CRB Index of 19 commodities in the same period.
Sugar, the worst performing commodity in the past 12 monthsin the UBS Bloomberg CMCI Index, also offers a good investmentopportunity in the medium term as about half of the Braziliansugar cane crop is going into ethanol making this year, Fox said.Brazil is the world's biggest grower of sugar cane.
Sugar-cane output in Brazil will rise to a record 528million metric tons in the current harvest, the Agriculture Ministry said in May. The South American country is the world'sbiggest maker of sugar and cane-based ethanol.
Cotton futures traded in New York have gained 30 percent since the end of April as Chinese imports are expected to rise to 3.8 million tons from 2.5 million tons, according to theInternational Cotton Advisory Committee's report July 2.
``Cotton has lost acreage to grains in the U.S. and high oil prices have boosted the production cost of synthetic fibers,'' John Reeve, associate director for agriculturalcommodities at UBS in Singapore, said in an interview June 20. Drought in Australia and lack of irrigation water will reduce output from the world's fifth-largest cotton exporter, he said.
Demand for cotton is strong and supply has been disrupted by droughts, said Macquarie's Rocks. ``The fundamentals are supportive. That should go up,'' he said. Still, Rocks doesn't favor sugar. ``Sugar is a total disaster. You are never going to get the sugar price sustainably high,'' he said.
When I invest in a commodity, I like choose those commodity that is high in demand, and facing supply disruption, over time price will go up. This is happening to Lead and Cotton now.
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