Deutsche bets on rising food prices

Bullish investors profit from rising prices for agricultural commodities with a new product from Deutsche Bank.
The recent correction in the commodities market is no cause for alarm, according to Deutsche Bank. Leading commodities indices tumbled during March but the bulls remain defiant, particularly in the agricultural sector.

The forces driving food prices higher, say strategists, are not about to change any time soon. Population growth and economic development in China and India are creating huge new demand. At the same time, as people become wealthier they tend to eat more meat, which means more livestock and grazing land, which means less land to grow crops. To make matters worse, crops grown to make ethanol and biofuels also take more agricultural land out of the food chain. In other words, high prices are here to stay.

"We believe the recent correction was about profit-taking," says Deutsche director Sharon Loh. "If anything it's a buying opportunity in our view. The bullish commodity sentiment is not only a demand story, it's also a supply story."

Of course, Loh would say that as she has just helped Deutsche to launch two funds in Singapore that give investors exposure to the agriculture sector. But
judging by the reception from investors, Loh is not the only agriculture bull
in the world - globally it sold $750 million in three weeks - despite the correction.

That suggests investors are starting to consider other options besides the traditional asset classes of cash, bonds and equity, thanks to the poor returns they have been getting. As well as exploiting a long-term bull market in food prices, investors are also understanding the diversification benefits of commodities û the price of wheat and other crops tend to move independently to those of stocks and bonds.

The DB Platinum Agriculture Funds (one in euro, the other in dollars) are aimed at retail investors and tracks the bank's own agriculture index, which invests in futures contracts using a strategy that aims to profit from price discrepancies in the forward market.

Instead of just buying the shortest-dated futures contract for each commodity, as most indices do, Deutsche's so-called Optimum Yield technology invests flexibly along the forward curve, minimising losses when prices are higher in the future and maximising profits when they are lower.

The biggest components of the index, each accounting for 20% of the allocation, are wheat, corn, sugar and soybeans. Cotton, coffee and cocoa make up the rest.

The fund is structured as a simple index tracker with a 5% subscription charge and a 1.2% annual management fee.
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