With a runaway greenback and a US rate hike supposedly in the offing, what better time to review what's going on down on the farm. But first a caveat: it's notoriously difficult to call the peaks and troughs in commodity markets - doubly so when we're talking about agricultural products. Technical analysts might beg to differ on this point, but lest we forget: perceived investment risk usually equates to little more than tracking error; anyone can appear erudite when they're looking over their shoulder.
With most commodity markets in the doldrums, you can either walk away, or try to identify any viable recovery plays, but that's all the more challenging given the number of currencies depreciating against the dollar. That last point is critical for commodities that are prone to 'inventory-build', or those with elastic demand. As a consequence, most bulks and industrial metals are now off the menu. But there are some soft commodity investment options worth considering.
Why now? Well, recent climate modelling from meteorologists in Australia and Japan suggests that the El Niño weather system now taking hold in equatorial zones could prove to be one of the strongest on record.
Research from Credit Suisse revealed that prices for some soft commodities - most notably, cocoa and soybeans - have tended to benefit from the onset of El Niño in the past. Cooking oil demand is transferable. So if palm oil production is negatively impacted by drought in Indonesia and Malaysia, demand for soybeans for pressing could surge. Soybean prices have already received near-term support as recent figures from the US Department of Agriculture (USDA) point to decreases in projected stocks for corn in both the 2014-15 and 2015-16 marketing years. That means reduced corn oil pressing - the transferability dynamic kicks in again.
Meanwhile, cocoa prices hit a four-year high recently due to a disappointing crop in the world's second-largest producer, Ghana. And recent analysis from Commerzbank predicts that a global deficit this season should strengthen prices further through the remainder of this year. This could be exacerbated if El Niño eventually affects growing conditions in west Africa, which it has in the past. The region - principally Côte d'Ivoire and Ghana - accounts for 68 per cent of world supply.
