Cashing in on commodities

You may think that agri-commodities are for sophisticated investors only, as they involve a high degree of understanding and speculation. But they are turning to be an attractive alternative investment for ordinary investors, too. Kande R. Ramesh is among the many regular investors in commodities.

This 34-year-old invested in contracts of sugar and gur five months ago on anticipation of a higher sugar demand and a decline in production. On a hunch, the businessman from Karnool, Andhra Pradesh, also invested in jeera this July. When he settled his position last month, Ramesh netted Rs 1.5 lakh on sugar and Rs 30,000 on gur. Jeera let him down with a loss of Rs 1 lakh mainly on account of quality concerns, but overall, Ramesh romped home clear with a profit of Rs 80,000. “I have knowlegde in commodities. I regularly track their price movement,” he said.

For many investors, agri-commodities are proving to be a good hedge against inflation. Last year, select agri-commodities surged by an average of 25 per cent far ahead of inflation (12.44 per cent on August 2, 2008) making their investors richer.

Look before you sow

Still, in the world of agricommodities, investors must step with caution. There are many factors that play on agri prices in the short run. These could be geographical, political or pure economic factors like supply and demand.

Says R. Ramaseshan, CEO, National Commodity and Derivatives Exchange (NCDEX): “One should track the build-up of the monsoons and crop sowing patterns, and even crop damages due to pest attacks.”

But from an investment point of view, agri-commodities should do well over the long haul. One factor going in their favour is the diversion of agricultural land to biofuels globally in response to high crude prices. Says Hyderabad-based Harish Galipelli, Chief Analyst, Karvy Comtrade: “High oil prices resulted in land being diverted from traditional commodities like sugar, palm oil, soyabean oil, corn, etc., to industrial use, thus, curtailing their supply in the market.”

High-yield crops

So, which agri-commodities can reap good harvests for investors? A sweetener for your portfolio in this market is sugar. Sugar prices in Maharashtra increased 17 per cent this August to Rs 1,675 per 100 kg from a month ago. Analysts see prices at Rs 2,000-2,100 per 100 kg by December, 2008. The reason? The acreage under sugarcane declined to 4.4 million hectares from 5.3 million hectares last year. Besides, the diversion of sugarcane to produce ethanol may lead to lower production of sugar in India. “Sugar looks good as an investment opportunity,” says Galipelli.

Another popular commodity with investors is soyabean. Says Galipelli: “Demand for byproducts, such as soya oil and soya meal, is robust.” Due to a rapid rise in its price, a correction could be on the cards, according to Badruddin, Senior Research Analyst, Angel Commodities Broking. But over the long term, soya prices should stay firm on the back of the rising demand for edible oil in India.

The star commodity last year, however, was turmeric. The yellow spice delivered the highest returns as its prices doubled over the last one year. Badruddin feels turmeric prices will remain strong till the end of the year due to a crunch in supply. “Investors can buy NCDEX turmeric October contract at Rs 3,420-3,480, but should maintain a stop-loss of Rs 3,340.

For starters If you’re new to commodity investing, begin with a modest outlay. Start commodity futures by paying just 5-15 per cent of the original value of the contract Even a small price movement can have a big impact on your commodity portfolio Keep an eye out for demand and supply and crop production to be successful in commodity investing Investors should take advantage of the commodity market, but keep their exposure levels in check Commodities carry a negative correlation to other asset classes. Including commodities will bring in stability at your portfolio

The commodity could hit Rs 3,850-4,050 per quintal in about a month,” says Badruddin. Spices are in demand now. “Spices like turmeric, chilli, pepper, jeera, cardamom and coriander are expected to extend their bull run on the back of robust global demand.

International markets are looking at Indian spices as the crop in other producing countries has declined,” says Galipelli. Another popular spice is jeera, whose prices rose 34 per cent between April and mid-August this year. Though the Indian production has been good, a decline in production in Afghanistan, Syria and Iran has led to a buoyancy in prices. “Investors can go for a ‘buy’ in the commodity,” says Badruddin.

Jeera stocks will remain low till fresh arrivals commence from February-March next year. “Investors can buy October Jeera at Rs 11,390-11,425 and keep a stop-loss below Rs 11,000,” says Badruddin. “We have a target of Rs 12,100, then Rs 12,400 in about a month.”

On the other hand, pepper is in short supply, and the north Indian markets are expected to step up their purchases in the coming weeks. Badruddin notes that this should strengthen prices till November. Thereafter, the trends in global production will determine its prices. He recommends a ‘buy’ on pepper September contract at Rs 13,350-13,400, with a stop-loss of Rs 12,800. His target is Rs 15,000 in one month.