Agricultural commodities, including coffee, offer tasty long-term rewards as global demand rises and wealth spreads, especially in emerging markets, where population growth is forecast to soar.
The supply-demand strain will remain a long-term theme, considering where these commodities are produced versus where they are consumed. The world relies on four areas to produce agricultural staples for global consumption. These are North America, Europe including Russia, South America (Argentina and Brazil) and Australia. As producers, the emerging markets, and in particular Asia and Africa, are poorly represented. With population growth in the emerging markets accounting for 93% of global populace growth by 2020, their consumption of agricultural commodities will continue to intensify demand. It is not America or Russia that is driving the price of food, but emerging market consumption.
There are additional drivers strengthening demand within emerging markets. Rising income per head in countries such as China and India are driving up global meat consumption, boosting requirements for animal feed that in turn exerts further pressure on grain supplies. And against this consumption is the decline of farms in developing countries as they make way for rapid urbanisation and the creation of mega-cities. All these factors indicate a long-term demand-led cycle across the agricultural commodities. Spikes are to be expected as event-driven hiccups will stretch supply. Yet, the demand curve moves to normalise within a new high price range.
Funds that may have previously shunned agricultural commodities have seen the long-term viability of this asset class and chosen to shrug off short-term volatility for long-term portfolio benefits. America’s largest pension fund, the California Public Employees’ Retirement System (Calpers) has had up to 3% of its portfolio in commodities since 2008. The country’s second largest pension fund followed in June 2010, voting to increase its commodity allocation to up to 5% of its total holdings.
As with other markets, short-term volatility will persist in agricultural commodities. Yet investors who are able to take a step back and look at the potential developments know the supply-demand fundamental is driving agricultural commodities to new heights.