Agricultural land could be next big thing

Aug 4 2008 by Karen Dent, The Journal

THE outlook for commodities? Investors will have taken a pounding this year on the back of turbulent market conditions, but some of their pain will have been soothed if they have had oil and commodity stocks, the latest “in vogue” investments.

The share prices of many oil and commodity companies peaked earlier this year, partly due to investors’ appetites for commodity stocks on the back of insatiable demand from developing economies and partly due to a wave of consolidation approaches, including a bid from BHP Billiton for Rio Tinto. However, over the last few months there has been a change of fortune and the value of many oil and mining companies has fallen as investors take fright from the impact of the global economic slowdown. Some believed that commodities were immune to the global economic slowdown and regarded them as “safer” bets. However, as past performance shows, commodities do not go up in a straight line indefinitely. Gold for example, is generally perceived as a “safe” haven, but in 1980 to 1981 the price crashed by around 50%. An investor who bought then would have only broken even last year. In the 20 or so years that followed, commodity prices slumped to depressed levels. However, in 2005 this all changed after a 70% surge in iron ore prices, fuelled by strong demand from the BRIC (Brazil, Russia, India and China) economies amidst a backdrop of a growing global economy.

Some companies benefited from the higher oil and commodity prices. BG Group, the natural gas business, recently reported buoyant second quarter results which beat analysts’ expectations. Operating profits were up by a lofty 92% to £1.4bn thanks to higher commodity prices as well as better exploration and production volumes. Despite the positive news, the share price failed to re-ignite a rally and still remains notably lower than its peak of 1394p in May this year.

Others have lost out. Europe’s largest budget airline, Ryanair, has had a torrid time due to sky-high fuel prices. The group recently issued a first quarter profits warning showing an 85% slump in revenues. The company has warned that it may only break even in 2009. The oil price hit a record high of $147 per barrel only a few weeks ago, but it has since slipped back. Some other commodity prices are still climbing. BHP Billiton, the world’s largest mining group, recently published a report highlighting a 96% hike in iron ore prices over the last year. Manganese, the trace element which is essential when working with metals such as aluminium, is forecast to triple in value.

We may have waved goodbye to surging oil prices for the time being but it won’t be long before investors move on to the next opportunity. With all the concern about global warming and the impact on growing crops to feed ever increasing populations, the next investment opportunity for private investors could be international agricultural land as UK prices have already risen. Water has also been flagged as the single most important resource.

Christine Hawdon is assistant director of Brewin Dolphin Newcastle.