Soft commodity price cycles last for about 20 years and Australia is currently about halfway through the latest, Great Southern Funds Management funds manager David Bryant told the PortfolioConstruction Conference.
“We are talking about 2020 before the current commodity price cycle finishes,” he said.
“If this is a typical 20 year cycle, we will see soft commodity prices continue to increase.”
One of the drivers of the current boom in soft commodities is high energy prices.
Great Southern research has found that when energy prices rise, the impact is initially felt in the metals sector due to higher operating costs.
Soft commodities follow this sector’s increase as people look for alternative sources of fuel.
In February 2002, energy prices started to rise and metals moved in December 2005.
“Grains didn’t start to rise until October 2006 and have been rising steadily since then,” Bryant said.
In the US, corn is being used to create ethanol while the Brazilians are using sugar cane to create an alternative fuel source.
Ethanol created from corn is about US$50 a barrel compared to an average of US$150 a barrel for oil.
“While energy is dear, people will turn food into fuels,” he said.
“The soft commodity prices are driven by the energy sector and will remain so until a new source of energy is discovered.”
While the growing world population is also a factor in driving the commodity price boom, it is the growing middle class that is the real driver, Bryant said.
In 2000 the global middle class accounted for 0.5 billion of the total world population of 6.1 billion.
However, by 2030 the middle class will be 1.3 billion of a total 8.2 billion global population.
“The important area of growth will be the middle class, as they move from eating starchy food to more protein,” he said.
This will benefit industries such as dairy, cattle and horticulture.
“The increase of this sector of the global population will be a driver for the increased consumption of these commodities,” Bryant said.
“And with the signing of a free trade agreement with ASEAN, this will benefit the Australian horticulture sector.”
