Oil is today’s news. Gold is always news. But what about wheat? Wheat is one of the agricultural commodities, the Cinderella sector of commodities. While energy and metals have attracted the attention of investors, agriculture - a so-called ‘soft’ commodity - has often been overlooked.
Yet agricultural commodities have their attractions, among them the fact that they are contra-cyclical – they do not move in tandem with the business cycle. During recessions, for example, agricultural commodity prices tend to rise.
Few pension funds would want to invest in individual agricultural commodities, but one way that they can invest in them as a sector is through the agricultural segment of a commodities index fund.
Diapason Commodities Management, based in Lausanne, runs a commodity index fund which offers options for investment in the three basic segments of commodities – metals, energy and agriculture.
The index fund tracks the Rogers International Commodities Index (RICI), one of the four main commodity indexes. The RICI was created in 1998 by Jim Rogers, co-founder with George Soros of the Quantum Fund, and is designed to replicate as closely as possible the characteristics of the commodities market.
The RICI comprises 35 commodities for which futures contracts or forward contracts are regularly traded in recognised markets. In September it was up 234% since its inception.
In 2003, Rogers, in partnership with Stephan Wrobel from Lehman Brothers and Lionel Motiere from Société Générale, set up Diapason as an investment management arm to build, manage and promote investment products designed around the RICI. To date Diapason’s funds have attracted more than $1.5bn (E1.2bn) from Europe, Asia and the Middle East.
Diapason offers investors a Dublin-listed commodity index fund in two euro classes: unhedged and hedged against all currencies. There are plans for an onshore version.
Uniquely, Diapason slices the index into three segments - metals, energy and agriculture - with each segment available as a separate fund. This provides institutional investors with a direct route into agricultural commodities, Wrobel says. “If you want exposure to agricultural commodities, it’s very hard to get it through stocks, and it’s almost impossible through bonds. Some other indices provide exposure to agriculture, but mainly through swaps.
“We have a fund that invests directly and it’s the most diversified commodity agricultural fund that exists at the moment.”
The fund has proved a draw for customers, Wrobel says. “The flow into the agricultural fund from clients is far higher than what is going into the energy or metals funds. It’s very popular with institutions because they appreciate the contra cyclical nature of the segment and also the fact that agricultural commodities offer great value in terms of where they stand in the cycle.”
Wrobel says the one of the attractions of the RICI is that there have been few changes to the 21 agricultural commodities since the index was launched in 1998
This, he says, is in contrast to some of the other main commodity indices - principally the Goldman Sachs Commodity Index, Dow Jones AIG Commodity Index and the Commodity Research Bureau (CRB) - which may change the components of their agriculture commodities indices.
“For example, AIG took out cocoa last year and Goldman Sachs took out orange juice. Why would you do that? In real life these commodities represent a part, albeit a small part, of what people use in the consumption of commodities.”

The RICI represents the value of a compendium or basket of commodities used in the global economy. The compendium has three broad segments: metals and minerals, which include gold, silver, aluminium and lead; energy products, which include crude oil petrol and natural gas; and agricultural products, which include wheat, corn and cotton.
The three segments should be managed separately, says Wrobel, because they behave differently. Although all commodities respond to the same broad secular trends, such as the imbalance of supply and demand and the depletion of inventories, they behave differently in the business cycle, he says.
“Metals and minerals are very pro-cyclical. If there is an economic slow-down, metal will slow down a bit, and then when you get pick up, they will accelerate.
“In the energy market, supply and demand is tight and well in balance. This means that whenever activity picks up its effects are felt immediately in the direction that prices move. The effects are also felt when the economy slows down, but to a lesser degree than in the metals market.”
The wild card is agriculture, Wrobel suggests. “Agriculture is a segment that is very contra cyclical. It operates against the economic cycle. Our historical research has shown that during recessions agricultural commodities tend to do very well.”
The market for commodities investment has broadened says Wrobel. The main growth has been in structured products. “The market had gained a lot of breadth in the past 12 to 18 months. It has grown from being very much a swap-oriented market to a structured product market where people can find what is most suitable for them.”
The move from swaps to structured products is linked to the move from trader-driven to investor-driven investment in commodities, he suggests. This in turn has meant a switch in interest from ‘thin’ commodities indices - where liquidity, the ability to trade in an out of commodities, is guaranteed - to broad indices like the RICI.
“The driver of the commodities market used to be the swap market. Traders said they would prefer thin indices because the liquidity was there and it was easier for them to hedge themselves,” continues Wrobel.
“This is because they were selling swaps. When you are selling swaps you are guaranteeing an exposure plus or minus a certain differential. So you are putting your capital at risk. With a fund, the firm invests and does not put its capital at risk.”
Why should agricultural commodities be attractive to institutional investors? One reason is that valuations are at an historical low, says Wrobel. “Oil has been rising the fastest. But if you look at sugar and cotton on a real term basis you will see they are at the very rock bottom of their historical range, so the value is there.
“Agricultural commodity prices were in a downward trend between 1980 and 2001 because of large increases in production in the 1970s and improvements in the yield from agricultural land in the 1980s,” says Wrobel. In particular, the improvement in wheat yields has depressed prices.
This process could be coming to an end, he suggests. Wheat yields have begun to flatten out over the past five years. One reason for this could be the use of pesticides. Until now, farmers have been able to squeeze more production from the same area of land by using pesticides. “Now pesticides are destroying the quality of the humus, the most fertile part of the land. As result the yield tends to drop.”
These developments provide the catalysts which the agricultural commodities sector needs to encourage people to invest.
Demand for commodities is overtaking supply. Most developing countries will become net importers of agricultural commodities during the next 10 years, he says. Although China produces its own wheat, production will be limited by growing water shortages and spreading urbanisation, Wrobel says.
“In the 1980s and 1990s nobody was stockpiling commodities because they felt that the world was a settled place and there was no need to hoard. Now we think the reverse is taking place. In China they are building warehouses to store wheat because they feel they need to. The same thing is happening in the US following the hurricanes.”

On the supply side, companies have run down their reserves of raw materials. “Companies got rid of their inventories in the 1980s and 1990s because the management school mantra then was ‘just in time’ management,” says Wrobel. “As a result, they no longer carry stocks.”
There has also been a run-down in investment in agriculture. “In the bear market for equities up to 2000, nobody invested in agricultural production. Investment during the 20 years went into biotechnology, high-tech, so there was a capital famine into investment into the production of raw materials.
“Meeting demand for agricultural products could now take some time. In the meantime prices will rise and continue to attract new investment.”
Wrobel suggest that this combination of low valuations, low investment and low inventories represents a once and for all investment opportunity for institutions.
“People say that buying into commodities is difficult. They say they want to have a correction before they buy. Well, they’ve just had a correction in agricultural commodities, so if they are looking to buy on a set-back, here is their opportunity.”

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