How you can make bread from the soaring price of wheat
Sunday 15 August 2010
While doing your weekly shop you have probably noticed the price of bread going up – this is due, in part, to wheat soaring on the international exchanges as Russia, a major exporter, is wracked by its worst drought in a century.
In response, the Russian government imposed a wheat export ban from today until the end of the year.
Further drought and the possibility of other countries, such as Kazakhstan and the Ukraine, banning exports are likely to spur rises in wheat prices. But it is not just wheat that could be affected.
Apart from your weekly shop, how does this affect you? There is a way for investors – even with relatively small amounts of spare cash – to make money from these commodity-price moves. The only way for ordinary investors to gain exposure to individual commodities such as wheat, without getting into the complex world of trading futures or taking physical wheat delivery, is through exchange-traded commodities (ETCs).
ETCs track the performance of commodities such as wheat by mirroring an index of futures contracts, like the Dow Jones-UBS Wheat Sub-Index. ETCs are low-cost investment products that trade on stock exchanges, like the better known exchange-traded funds (ETFs).
David Brunning, the director of the independent financial advice firm Brunning Newman Houghton, says: "ETCs are excellent vehicles for accessing specific markets including commodities such as wheat. If you are interested in a particular part of the market, they offer a great degree of precision with transparency and at a low cost."
Over 200 ETCs are available, from ETF Securities, UBS and others on the London Stock Exchange through stockbrokers. Commission has to be paid on the sale and purchase of an ETC – which is typically £10 to £15 – and there is a small annual fee to pay. Crucially, investors can buy as few or many ETCs as they wish but, in order to be economic, a starting point of around £1,000 is usual.
But, as with any investment, there are risks. ETCs that do not own physical commodities invest in futures and these can provide returns that differ from the actual price of the commodity.
Commodities are also volatile. Daniel Wills, a senior analyst at ETF Securities, says: "It could be difficult in terms of sustaining further wheat price rises from here. We could see a period of volatility in returns."
Ted Hood, the chief executive of Source, a specialist ETC provider, agrees that the wheat price may be near the top: "Some think wheat concerns are overblown. Global supplies are more than adequate and prices are as likely to fall as to rise."
More widely, ETCs and ETFs provide low-cost access for ordinary investors who cannot directly buy a range of commodities. But what is the difference?
"If you want access to a single commodity, you buy the ETC and if you want broad exposure to a market, you can buy the ETF," Manooj Mistry, from Deutsche Bank, says. As with ETCs, investors can buy ETF shares through their stockbroker, paying commission and an annual fee.
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