Agriculturals to emerge from the shadows in 2010

LONDON/NEW YORK, (Reuters) – Agricultural commodities  could be poised for stardom in 2010 as weather concerns and  alternative fuel needs throw up strong fundamentals, after  lagging other commodity sectors this year.  

Softs, in particular sugar, will be volatile into 2010 —  but offer good returns for those with a strong stomach — due to  persistent rains in top producer Brazil, and India, the world’s  largest consumer, shifting from a major exporter to an importer.

“Sugar has very strong fundamentals that are here to stay  for more than a few months,” said Emmanuel Jayet, a commodities  analyst with Societe Generale.  

Peter Lucas, investment strategist with RBC Wealth  Management, said softs offered good value, but also singled out  corn and wheat for next year.

Corn consumption has risen to record levels, boosted by the  expansion of the U.S. ethanol programme, leading to a drawdown  in global stocks. The International Grains Council last month forecast corn  stocks at the end of the 2009/10 season (July/June) would fall  to 134 million tonnes, down from 147 million a year earlier.  

“In my opinion corn is the market which gives the trend of  the grain market in general and we will have decreasing stocks.  I think corn prices will increase next year,” Societe Generale’s  Jayet said.  

“Ethanol consumption in the U.S. is breaking new records  every month,” he added.  

Lucas said agriculturals had lagged a cyclical-driven rally  in which base metals out performed due to expectations of  growing demand as the global economy recovered.

Copper has surged 117 percent since the end of 2008 and  crude oil is up 98 percent. Among agriculturals and softs CBOT wheat is down 15 percent,  corn is off 8.6 percent, cocoa is up 23.5 percent and arabica  coffee is up 27.6 percent.  

Lucas also said “the overall environment is competitive for  a commodities rally, because of the weak dollar”.  

A weaker dollar makes investment cheaper for holders of  other currencies. The dollar has fallen 6.5 percent so far this  year against a basket of currencies and is widely expected to  extend that drop.  

But investing effectively in softs will be a question of  getting the right balance between fundamentals and technical  charts. Softs’ performance has varied greatly due to their  separate fundamentals.  

Raw sugar, for example, has soared 111.7 percent since the  end of 2008, largely because of India’s poor harvest, and on  expectations of another disappointing crop next year following a  weak monsoon.  

Cocoa set the highest levels in nearly 25 years in London a  week ago, powered by expectations of improving demand and  worries over tight supplies from top producer Ivory Coast and  other key West African growing regions vulnerable to disease and  pests.  

Commodity fund manager John Di Tomasso, president of Di  Tomasso Group Inc. in Victoria, Canada, advocated a “middle  approach” to investing in soft commodities, particularly after  new milestones set in recent weeks by sugar, cocoa and coffee.  

“We think some time in the next few years, the softs in  general will do well, but some specific softs are overpriced at  the moment,” Di Tomasso said.  

Improving prospects for grindings (a measure of demand) as  the global economy shows signs of recovery has also supported  cocoa.  

“It is very clear that grindings are starting to recover,  the onus is definitely on the supply side to be able to deliver  and it just doesn’t look likely,” said Kona Haque, commodity  strategist with Macquarie Bank.  

Arabica coffee has risen by a quarter this year, driven by  increased fund activity, the weak dollar, robust demand, and  recent concerns over falling Colombian coffee supplies due to  poor weather and a programme to replant ageing trees.

There are also worries over weather in top coffee producers  Brazil and Vietnam.