Ags and platinum: recession-proof commodity bets?

By Veronica Brown - Analysis
LONDON | Tue Feb 5, 2008 7:13am EST

(Reuters) - A punt on gold has paid off handsomely for investors trying to avoid the turmoil in global financial markets over the last few months, but a commitment to agriculture or platinum might prove to be smarter.

Commodity markets were at the centre of a shopping spree at the start of this year as fund re-allocation money poured into all sorts of basic resources from gold to palm oil.

But with the U.S. economy teetering on the brink of recession, investment opportunities in commodities may shrink as concern grows over the length and breadth of any downturn.

Analysts say the key to a sound investment is finding something that can hold its value on more than a portfolio diversification basis -- for some, this is where agricultural commodities come into their own.

"Agricultural investments will now probably be the biggest area for commodity investments. There's ethanol, global warning, urbanization in China, which all adds up to greater demand," said Chris Bouckley, a partner at UK-based fund manager Caliburn Capital Partners.

Grain had an impressive 2007, led by wheat and soybeans. Chicago futures prices for both gained more than 70 percent on low global stockpiles and robust demand partly due to exploding emerging market appetite and the biofuels revolution.

Speculators and longer-term investors have piled into grains as the fundamentals paint a compelling picture -- one that may endure despite financial market volatility.

"If people start losing confidence in the stock market I don't think that's going to translate into them eating less goods or agricultural products," said Gavin Maguire, analyst with Iowa Grain in Chicago.

The top pick for most within the agricultural sector is sugar, which has lagged the explosive rally that saw several other commodities hit record highs in January.

Prices are finding support after a near 8 percent loss last year. Analysts say the global market surplus is narrowing while demand for alternative fuel based on sugar cane is growing.

GOLD LIMITED AS PLATINUM FLIES

In precious metals, analysts are calling for a $1,000 bullion price, but with gold having hit $930 an ounce already the potential for further upside may be limited.

Platinum may be a better bet.

A power crisis in top global platinum producer South Africa has crippled some of the world's biggest mines and sent prices to record highs above $1,800 per ounce -- extending 37 percent gains made in 2007.

South Africa is responsible for 80 percent of world output, making the power crisis all the more pertinent for the supply outlook with no quick fix in sight.

"We expect acute South African power problems to cost the platinum industry about 200,000 ounces of platinum production in the first quarter of 2008," UBS said in a note to clients.

The bank lifted its platinum price forecast to $1,800 an ounce in 2008, $2,100 the next year and $2,300 in 2010 from previous predictions of $1,520, $1,450 and $1,375 respectively.

OMINOUS PAST, BRIGHT FUTURE

While grain and soft commodity markets look ripe for the picking now, a look at past performances during periods of financial turmoil suggests they are not without risk.

Going back to the Great Depression of the 1930s, U.S. farmers found themselves competing in an oversupplied international market, where prices fell and they were often unable to sell products at a profit.

In the U.S. slowdown of the early 2000s, soybean prices on the Chicago Board of Trade fell around 5 percent between March and October 2001, while wheat and corn barely budged. World stock markets lost 18.4 percent in the same period.

The key change going forward, and keeping analysts optimistic, is interest from emerging markets.

The urbanization of China is expected to march ahead even if progress is slowed by a U.S. recession.

"(Agricultural resources) are what we call non-economically sensitive commodities," said Shawn Hackett, president at Hackett Financial Advisors.

"I believe that the corrections that we may see in commodities as a result of this global financial crisis will be one of your last opportunities to buy most before the sweet spot of their bull market rise reaches the maximum level of acceleration."