Buy Food, China Is Hungry: Analysts

Chinese demand, the weather and political risks will lead to a very volatile year for soft commodities' prices, analysts at Swiss bank Sarasin wrote in a research note Wednesday.

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“Global prices of agricultural commodities are picking up again. This leads to higher foodstuff prices, which in December passed their zenith of 2008, according to data compiled by the United Nations and spurs political tensions,” according to Sarasin analysts.

“We do not expect the situation to defuse anytime soon because the tight conditions in the agricultural markets are likely to persist,” they wrote.

Chinese demand will underpin the market as a wealth effect sees its need for imports rise sharply, Sarasin analysts predicted.

“Chinese consumption should stay strong in the coming months and lift demand for proteins. This is also evident from the rising volume of Chinese agricultural imports. Progressive industrialization and continued urbanization reduce the availability of arable land. China will therefore find it increasingly difficult to grow its domestic production,” the note said.

“Since the labor-intensive cultivation of vegetables and fruits for the export market is more profitable for Chinese farmers than cultivating land-intensive grains and oilseeds, the import dependency of the latter is increasing.”

“For some years now, China has recorded a rising level of soybean imports. Chinese corn imports have also posted a strong increase in recent months and China has lately become a net importer in this market,” they wrote.

Watch the Weather Channel

With supply growth sluggish, strong demand can only be met if there are no major supply shortages, the analysts said.

“If weather conditions are not optimal, which was the case in 2010, the harvest will be nowhere near enough to satisfy the powerful growth in demand. The drought that seared parts of the former Soviet Union and Europe, together with the disruptive rainfall in Canada and Australia, has had a negative impact on the wheat harvest,” they wrote.

“Since these countries are among the world’s biggest wheat exporters, this has had a significant effect on prices.”

“The weather will remain a major driving force behind prices. The La Niña phenomenon, which is responsible for the current floods in Australia, is noteworthy in this regard," they said.

This La Niña cycle is the strongest one in 40 years, the analysts wrote, noting that it often brings dry weather to South America and could impact corn and soybean crops there.

How To Trade Softs

Sarasin expects prices for a number of soft commodities to have another good year, particularly those that benefit from Chinese demand, like corn and soybeans. Volatility though could be high so don’t put all your eggs in one basket, the analysts warned.

“We do not recommend investing in individual markets because the risks are much too high," they wrote.

"That said, a portfolio of corn, wheat and soybeans should continue to gain in value as a result of the tight situation in the grain and oilseed markets.”