January 20, 2011

US farm commodities recover through exchange traded products

US farm commodities has staged a sharp recovery and flourished from investors through exchange traded products, carrying net inflows of some US$400 million in the final two months of 2010.

Crops lagged in terms of investment flows behind hard commodities for most of last year in the market for exchange traded products (ETPs) - easy-to-deal instruments designed to mirror the performance of an underlying asset, such as corn or gold, or a range of them.

However, crop ETPs fought back from a weak summer performance, which saw net outflows of nearly US$400 million in May alone, the month before setbacks to crops in Canada and Russia raised the alarm over food commodity supplies.

Net inflows into the segment in December alone came in at approaching US$300 million, mirroring the jump in prices of food commodity futures.

Nonetheless, this injection was insufficient to prevent agricultural commodity ETPs overall reporting a net outflow of some US$500 million for the year.

Societe Generale attributed the increasing popularity of commodity ETPs, which overall attracted net inflows of nearly US$23 billion last year, to both hopes for the "improved perspective" for world economic growth, and fears over the impact on inflation.

"The rally in commodity prices has been significant and directly associated with the expected pick-up in demand," the bank said, "but reallocation to protect against inflation has clearly played a role as well."

Prices of assets such as commodities have a big say in calculating inflation rates, and so are seen as vehicles for protecting the value of capital in times of steep price rises.