The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
Chew Soon Gek, Singapore-based managing director and chief investment officer for Asia, expects the uptrend in commodity prices to last longer than in previous cycles and recommends an allocation of about 10% to diversified commodities in a balanced multi-asset portfolio.
ôLower agricultural production due to climate change and urbanisation, historically low stock levels, and higher consumption of meat and dairy products in emerging economies, particularly China and India, will continue to drive demand higher in the long-term,ö says Chew.
Chew is responsible for managing portfolios in Asia and is a member of the banksÆ private wealth management global investment committee. As CIO, she is responsible for asset allocation in Asia, portfolio construction and advice to clients, and investment strategy.
High oil prices have also improved the viability of biofuels, she notes. The International Monetary Fund Food & Agriculture Organization Working Group estimates biofuel's contribution to higher food prices to be between 20%-30%.
Many countries, including those in Asia, are increasingly pursuing food security policies, such as export quotas or tariffs, which are also driving soft commodity prices higher. Indonesia, Vietnam, China and India, for example, have introduced various measures to address the situation over the past year.
ôSuch food measures are likely to stay in place for longer or even cast wider as governments tackle pressures from soaring inflation and food prices,ö she says.
Chew highlights the diversification benefits from investing in soft commodities. Correlation with other assets, including stocks and bonds, are low. Over the past year, commodity prices have continued to climb despite weak stock markets. Commodity cycles tend to be structural and long, so the current upswing probably still has potential upside. Commodities are also a good hedge against escalating inflation risks, now very much an issue in Asia.
Inflation has been on most investorsÆ minds, with particular focus being placed on rising food prices.
The price of rice û an important staple in many Asian countries û has soared steeply in US dollar terms by more than 75% since the start of the year. Prices of commodities such as corn and soybeans also rose sharply at double-digit rates, with the exception of wheat prices. For wheat, this was a step in the direction of normalisation after the exorbitant rise experienced last year when a major drought in Australia led to extensive export losses.
The rise in agricultural prices started late in the current boom in commodity prices compared with past commodity price cycles, Chew notes. Within agricultural products, there has been a comparatively steady rise in the price of soybeans, while the price increases in other agricultural products tended to come in waves.
At the end of 2006, the price of corn rose in line with its expanded use in the production of ethanol in the US. This was followed by a hefty expansion of the area under cultivation for corn in 2007.
ôThe greater supply helped keep the price of corn in check,ö Chew says. ôHowever, the expansion of land areas for corn cultivation took place at the expense of areas for wheat cultivation. In 2007, owing to unfavourable weather conditions, wheat harvest globally was reduced, leading to the surge in wheat prices.ö
While the surge in wheat prices has been correcting and prices have been falling since mid-March, the price for rice, which has been increasing since September, continues on its steep upward trend.
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