There is currently “a classic supply-demand pinch in soft commodities”, according to Tilney’s chief economist, Peter Bickley. Supply of items such as cocoa, sugar, coffee and wheat is struggling to meet the level of demand arising from global phenomena – for example, growing urbanisation and interest in alternative energy sources such as biofuels. As a result, Bickley has predicted a structural shift in pricing, rather than the usual cyclical changes.

He explained, ‘On the supply side, we have drought in the US and the El Niño effect, as well as urbanisation encroaching onto productive agricultural land around the world – particularly in China. On the demand side, the world’s population is increasing and it is also getting bigger in another sense: as incomes rise, people’s propensity to eat meat increases – it takes 4 kg of grain to raise 1 kg of chicken.

‘In addition there’s the whole biofuels issue. Regardless of whether you think this is a load of over-hyped nonsense from an environmental perspective, it is popular politically so demand for biofuels looks set to soar.’

Bickley added, however, that investors should spread risk through a managed fund, rather than speculating on single commodities. Tilney funds analyst Vince Regan selected the Schroder Agriculture Fund as a good example. ‘One of the things that appealed about this fund was the wide universe of agricultural commodities in which it invests,’ he said. ‘It contains up to 42 items ranging from the relatively common, such as wheat, corn and coffee, to the more esoteric, such as spices. Of these, 33 are available via exchange-traded futures and the remainder via equities.’