Rising affluence and accelerating population are the two factors that are driving what has been termed the commodities supercycle. The more people there are in the world, the more “stuff” they need. This rise in demand caused by population growth has been compounded by rising wealth in the emerging markets of Asia.
A disposable income boom
We should all be very jealous of wage inflation in some of the fledgling Asian economies. Figures released two weeks ago showed that Indian wage inflation averaged 15% in 2007 – a similar level to that seen in 2006 and 2005.
‘You can make good money now in Mumbai as a driver – although the salary does depend on the boss’ 35-year-old chauffeur Bharat Jadhav told the BBC last Monday.
‘My wages have gone up every year by over $100 – that’s almost a 20% jump annually.’
This pattern of rising affluence is creating a boom in disposable income – a boom that will last for years and years.
Why commodities are not a one-way bet
But I have a warning.
Despite the fact that more people have more money to buy more “stuff”, that does not mean commodities are a one-way bet. There are always bear markets in bull markets and bull markets in bear markets.
There will be ups and downs in commodity pricing as hot money chases the latest investment trend. It’s guaranteed.
That means there are some commodities I would advise you not to invest in at the moment. You need to wait until after the next correction… but these will all be long-term buys after their upcoming fall. It’s just that the timing is not right.
The major danger of soft commodities
One of these is wheat – the latest “hot investment thing” that illustrates the major danger with soft commodities.
As wheat prices have soared farmers have rushed to plant the crop. With a gold mine, for example, it takes years of exploration, development, planning and negotiation before a single ounce is dug out of the ground. The time lag between deciding to become a gold producer to actually becoming a gold producer is 3, 4, possibly 5 years. This is not the case in softs.
If you have the land, you can plant it. A few months later you have a crop of wheat. A crop you can sell.
Don’t get burned investing in wheat
This means that soft commodities can pull back sharply, as supply can be influenced relatively quickly. The rug can be pulled out from under your feet. Be very careful.
I am still bullish on grains over the long term; but I think you should stay away from standalone wheat investments for now. There’s too much hot money – and you could get burned.
This article is taken from Garry White’s free daily email ‘Garry Writes’.