How to invest in rising food prices

The cost of agricultural and 'soft commodities' such as coffee and wheat have dramatically increased over the past year and now international wheat prices are at their highest for a decade, sending buyers into a panic.

In Europe wheat prices have almost doubled to €237 a tonne this year. Last week after Canada, the globe's second-largest exporter cautioned that its output could be a fifth less than last year's levels - wheat rocketed to a record $7.54 a bushel in Chicago.

Due to the boom, the cost of pasta in Italy is expected to increase by 20%. In the UK, bakeries predict they too will pass on further wheat price rises, and in France the cost of a baguette, a staple of the French diet, is expected to rise.

According to Richard Crane, an analyst at Deloitte, the rising price of wheat and soft commodities is compounding the negative impact of foot and mouth on the UK to a much greater extent.

He said: 'Many producers are facing almost 100% price rises in feed costs – the largest cost in producing livestock. Looking ahead production is unlikely to be viable without price rises.'

Earlier this year, there were riots in Mexico after the surge in crop prices sharply drove up the cost of tortillas. But experts think the new highs do not represent a peak and investors could do very well over the coming years.

Christopher Wyke at fund management group Schroders says: 'After coming out of a quarter-century bear market, we are now at year one of a 20-year bull market in agricultural and soft commodity prices.'

Bob Haber, manager of the Fidelity American Special Situations fund adds: 'I believe that far from reaching bubble proportions, commodities in many cases remain mispriced. They are being driven by a deep-seated secular trend that will support prices for many years. The supply side for many items is not as flexible as before and demand is likely to keep growing for many years to come.'

Bad weather, increasing demand from emerging economies and a growing desire for alternative fuels are the three primary causes of rising crop prices. The weather has been disastrous for wheat. This summer, too much rain in Germany, the UK and France, Europe's largest supplier, has reduced supplies. On the other side of the world, Australia, one of the largest exporters of agricultural produce, has been enduring its worst drought for more than a century.

'Egypt is the largest importer of wheat in the world. It normally sources it supplies from Australia and it has increased its order by 250% this year because of the lower supply,' says Wyke. 'In addition, Morocco has upped its order by 300%. But the question is where are they going to source that much extra?'

The world population passed six billion in 1999 and, according to the United Nations, every year there are 78 million more mouths to feed - providing a strongly expanding market at a time when world food stocks are at historically low levels.

The boom in emerging markets such as such as China and India has meant increasing wealth. As a result in China the population is now consuming expensive food such as beef in greater quantities than ever before - consumption of dairy produce there has doubled over the past five years.

Approximately 9lbs of feed is required to produce 1lb of beef and in China, the population is eating four times as much beef today as it did in 1980. There is a huge demand across Asia for animal feedstuffs with massive orders from Taiwan and Japan placed just last week.

Policy changes and government-mandated programmes are driving the market for alternative fuel, particularly ethanol, which is derived from corn and sugar.

In the UK the government wants 5% of all fuel sales to be biofuels by 2010 – an increase of 20 times on present levels while the US government wants to cut dependency on oil by 20% by 2017 chiefly through a fivefold increase in the use of renewable fuels.

Today about a fifth of America's maize crop is set aside for ethanol production, compared with 3% just four years ago. Brazil, the world's largest exporter, is investing millions in the area and plans to more than double ethanol exports from £308m to £667m by 2010.

So how can investors benefit? There are a number of ways you can invest. On the London Stock Exchange, there are several listed funds known as known as exchange traded commodities (ETCs) that track a range of agricultural goods including sugar, corn, cattle, and coffee.

ETCs, like exchange traded funds, match the performance of a particular index and investors can trade them during the day in the same way as ordinary shares.

Investors can also chose a basket ETC that tracks a number of different products. This is likely to give less volatile returns - the grains ETC tracks corn, wheat and soybeans.

Emerging markets tipped to reign in 2008

Political turmoil in Pakistan and Kenya has shaken investor confidence but experts predict emerging markets will still lead the way in 2008.

GROWTH: In China the Shanghai stock market grew by almost 100% in 2007.

While the developed economies of the world grappled with the turmoil brought on by the credit crunch in the second half of last year, emerging markets carried on rising.

For example, in China the Shanghai stock market grew by almost 100% while the FTSE 100 index rose by a more modest 7.36%. The best performing fund of 2008 was Gartmore China Opportunities, which posted growth of more than 60% over the year.

However in the opening days of 2008, trouble in Pakistan and Kenya, reminded investors once again just how volatile the emerging markets of the world can be. Pakistan's stock market dived on New Year's Eve - the first day of trading since the assassination of former Prime Minister Benazir Bhutto.

The Karachi Stock Exchange 100-share index fell by the 5% limit allowed under trading rules, shedding 689.72 points to 14,082.36. However the market is up by 40% over the past 12 months.

Later in the week in Chicago the oil price touched $100-a-barrel for the first time while gold reached an all time high of $860-an-ounce.

The geopolitical tensions – assassination in Pakistan, a disputed election in Kenya alongside tension in Northern Iraq and attacks on oil production facilities in the Niger Delta were all driving factors in pushing up the price of gold and oil.

Graham Birch, head of BlackRock's natural resources team and manager of the Gold and General fund says: 'On the supply side, production from the worlds' gold mines continued to decline and we believe it would take a significant further rise in the gold price to reverse this particular trend.

'Although in the short term jewellery demand may suffer some price related weakness, the long term outlook remains bright with emerging market wealth trends especially favourable.

'So, for 2008 we anticipate that the market patterns inherited from 07 will remain in place. While gold rarely goes up in a straight line the general tenor of the market seems likely to remain favourable.'

Gold's previous high of $850 an ounce was reached in 1980 when inflation got out of control, notably back then the world was not a happy place either – there was the Soviet intervention in Afghanistan and there was also the Iranian revolution to contend with.

But some experts say potential investors getting excited about the prospects for both oil and gold should maybe exercise some restraint, at least for now as the two most politicised of commodities could cool later in the year.

ustin Urquhart Stewart of Seven Investment Management says: 'When the phrase “all time high” is used people in their masses jump onboard forgetting about the simple rule of buying high and selling low and over the medium term the global economy is slowing, the US could go into a recession. Now would be exactly the wrong time to buy. Wait until later in 2008 and commodities may come off their current levels.'

The infrastructure and commodities themes will be intertwined as emerging markets continue to evolve over the coming decades and BlackRock continue to expect emerging markets to do better than developed markets in 2008, albeit by a smaller margin than in recent years.

The group notes however that political risk still exists but says that as long as investors have a well diversified emerging markets portfolio it should not be a reason to shun these types of shares.

Is gold the ticket out of the market storm?

As mounting problems grip the US banking sector - with American giant Bear Stearns the latest and greatest casulty - and put the skids under world stock markets, many are asking why gold cannot continue to rise ever-higher.

To answer that question it is important to consider why the price has reached record levels. The surge is down to a number of factors.

In times of market turmoil, gold is viewed as a traditional 'safe haven' because of its low correlation with other asset classes.

And the market carnage looks far from over. On Friday the world banking system fell into a fresh crisis as one of America's biggest banks, Bear Stearns, was on the verge of collapse.

The Wall Street giant admitted it could go bust despite emergency government funding, prompting panic in stock markets around the world. Wall Street shares plunged and the $20bn (£9.8bn) value of Bear Stearns dropped by 50% in seconds.

Such panic is likely to send a flurry of investors towards gold but demand for the commodity continues to significantly outweigh supply.

Mined gold has been stagnant and a lack of new mines opening, offset against the decline in gold production, has meant a drop in supply levels, which in turn has helped to send its value rocketing.

In addition, the weak dollar has been making gold look cheap to foreign investors as gold is often used as a hedge against fluctuations in the dollar. If the greenback appreciates, the dollar/gold price falls, while a fall in the dollar relative to the other main currencies produces a rise in the gold price.

It was in January that gold prices cleared the 1980 record highs of $875 in benchmark futures and $850 in spot, and they are up around 20% this year. But can the price of gold rise much further? According to experts it would appear that it can. Its 1980 high, after adjusting for inflation is actually $2,200 according to ETF Securities, more than double where it is now.

Hector McNeil of the group says: 'The fundamentals behind gold suggest that it has a way to go. Demand is outstripping supply. The weak dollar is not going to go anywhere soon, as the US Federal Reserve is only going to bring interest rates down at the moment given the problems in America and inflation is creeping in across the board.

'Just look at the oil price which also hit a new high this week of $110.7 a barrel, this too has helped push up the price. All of this suggests that gold can rise further.'

Much of the demand is coming from emerging market central banks including Russia, South Africa and Argentina. China is also looking to diversify its huge foreign currency reserves away from the weakening dollar, with gold a consideration.

A small increase in China's percentage of gold reserves would cause a huge increase in demand. Asia, particularly India, and the Middle East are seeing large increases in domestic jewellery demand as disposable income increases.

Katherine Yang at fund analyst Morningstar says: 'When people think that paper currencies will be worth less in the future, they have historically looked to place their net worth into a more stable vehicle.

'And gold is typically viewed as a safe form of currency, as its value isn't as affected by inflation. Worries about the supply of gold have also pushed the price higher - for example, the recent electricity shortage in South Africa has caused some unease about mine production.'

Morningstar says the best time to enter this market is when gold is trading at historical lows rather than highs and discourages investors from performance chasing. Because the gold price is hitting peak levels, it will have to drastically increase from where it is now to deliver comparable returns.

'However, we don't have a crystal ball to accurately predict which direction gold will go next, and gold prices are notoriously volatile,' adds Yang. Indeed, after setting records in January 1980, gold plummeted by almost 50% to about $480 per ounce three months later.

James Hughes of spread betting firm CMC Markets says: 'So long as investors remain worried about the outlook for the US economy, gold will - as always - remain a popular safe-haven choice for cautious investors. Simultaneously, the ongoing devaluation of the greenback also seems set to lend significant levels of support to the metal - so long as we continue to consider the price in US dollars.'

Compared to other asset classes, gold is one of the oldest or if not, the oldest asset class, it is indestructible, easy to store, liquid, and unlike cash, allocated gold is not subject to the credit risk of a bank. For investors looking to invest in gold there are a number of options they can consider.

How can I invest?

Funds and exchange-traded funds (ETFs) are two avenues for investors who want concentrated gold exposure. Which strategy is the right one will be dependent upon individual investing needs and comfort levels as each route has its merits and disadvantages.

Precious-metal funds and unit trusts do not invest directly in the physical metal. Instead they own mining shares, such as Yamana Gold. These funds available in the UK also hold a smattering of exposure to other precious metals such as platinum or silver.

How to weather stock market storm

The FTSE 100 index of the UK's largest firms dropped below 6000 on Wednesday – the last time it crossed that threshold was in October 2006.

The drop was echoed across the globe where New York's Dow Jones fell, by 2%, extending its loss on the year to date to 5.75% while both Tokyo and Hong Kong are suffering double-digit percentage falls.

On Thursday, the FTSE 100 was down again, closing at 5902.4 – representing a fall of almost 9% since the start of the year.

And the sentiment from the City is that the situation is likely to deteriorate further before it improves, so understandably investors are nervous and while it is the time of the year to re-examine existing investment portfolios, we ask the experts where they recommend cautious investors should put their cash.

Ben Yearsley of Hargreaves Lansdown, an independent financial adviser, likes Blackrock UK Absolute Alpha which aims to deliver a positive return to investors regardless of UK market conditions.

The fund, which is managed by Mark Lyttleton is designed to cope with volatile markets by allowing the manager to go 'short' or bet on shares or indexes falling rather than rising. The fund, which was launched in 2005, can also go fully into cash if the manager cannot find stocks that he likes.

He says: 'This fund has more chance than most of protecting you when markets fall. When FTSE 100 fell by 3.7% over the month of July last year, the fund was up by 1.1%. But when markets rebound it will not jump as high as some other funds.'

Another manager Yearsley rates is the ever-popular Neil Woodford who manages the Invesco Perpetual High Income fund. Woodford tends to be a defensive manager and invests in traditional defensive plays such as utility and tobacco firms.

'Neil Woodford has been around for a long time, over the years he has managed money through many market downturns so when things take a turn for the worse it's good to have your money with someone who has that level of experience,' adds Yearsley.

Darius McDermott of Chelsea Financial Services, another adviser, recommends the JPMorgan Cautious Total Return fund for more nervous investors. The fund invests in a mix of cash and fixed interest (bond) assets and aims to generate cash plus 3% after charges. Over the past three months while the average fall has been 0.5%, the fund is up 3.3%.

McDermott also rates the Insight Diversified Target Return portfolio. The fund is a multi-asset investment vehicle, in that it aims to spread risk by selecting from a wide asset range in order to cope with different market conditions.

Alongside traditional financial asset classes like shares, bonds and cash, it can also invest in absolute return funds, commodities and property funds.

McDermott says: 'This is a true multi-asset fund and is very resilient in downward markets. Over the past three months, while the average fall has been 0.5%, the Insight fund is up 2.1%.'

For his part Peter Chadborn, an adviser at CBK, says: 'While we recommend that all investors have a balanced portfolio, if an individual wanted to go with one investment vehicle, a managed portfolio would be their best option.'

Managed portfolios invest in a mixture of bonds, shares and cash.

Chadborn likes Gartmore Cautious Managed, which invests 44% of its assets in bonds with around the same in equities and the remainder in cash. Since launch, almost five years ago in February 2003, it has returned 58% against a sector average of 50%.

Chadborn also recommends M&G Managed Growth, a fettered fund of funds, meaning that it just invests in M&G products. Over the past five years it has, significantly outperformed against its peers - achieving a return of 140% against a sector average of 80%.

How to profit from the oil price

Investing in oil instead of filling up the car would have delivered a 34% return in the past six months. But can oil price rises continue and how should you invest?

The price of a barrel of crude has hit all-time highs of more than $140 a barrel since the turn of the year.

If a motorist had taken the £60 cost of filling up once a fortnight, from January to the end of June, and placed it in a fund tracking the price of oil instead, they would have seen handsome profits.

With a £60 fill-up every two weeks, in the first six months of 2008 the typical family car would have used £780 worth of fuel.

If a driver had ditched the motor and taken that £780 and invested it in the ETFS Securities Brent 1 Month exchange traded fund, it would have rocketed by no less than 34% to £1,034, over the same period.

But after peaking last week, prices of oil have slipped back and been flatter over the past seven days. US crude has remained near $135 a barrel and at one point oil fell as low as $132, more than 10% below the record $147.27 reached on 11 July.

Overall the price of oil has been on an upward trend for more than six years now - the longest period of rising prices on record.

Train and bus operators are enjoying a surge in popularity as high oil prices push commuters out of their cars and into public transport.

Statistics from the Department for Transport indicate the rate of car usage has fallen every quarter in the last year from a high point of annualised growth of 4% seven years ago.

While a more environmentally-friendly demographic may be emerging in the UK, the soaring cost of oil is undoubtedly a major motivator.

And despite slight falls in the use of oil in the UK and US, developing economies are predicted to continue to fuel higher demand for years to come.

Tony Hayward, chief executive of oil giant, BP, recently said: 'The defining feature of global energy markets remains high and volatile prices, reflecting a tight balance of supply and demand.'

How to profit from the oil price

Investing in oil instead of filling up the car would have delivered a 34% return in the past six months. But can oil price rises continue and how should you invest?

The price of a barrel of crude has hit all-time highs of more than $140 a barrel since the turn of the year.

If a motorist had taken the £60 cost of filling up once a fortnight, from January to the end of June, and placed it in a fund tracking the price of oil instead, they would have seen handsome profits.

With a £60 fill-up every two weeks, in the first six months of 2008 the typical family car would have used £780 worth of fuel.

If a driver had ditched the motor and taken that £780 and invested it in the ETFS Securities Brent 1 Month exchange traded fund, it would have rocketed by no less than 34% to £1,034, over the same period.

But after peaking last week, prices of oil have slipped back and been flatter over the past seven days. US crude has remained near $135 a barrel and at one point oil fell as low as $132, more than 10% below the record $147.27 reached on 11 July.

Overall the price of oil has been on an upward trend for more than six years now - the longest period of rising prices on record.

Train and bus operators are enjoying a surge in popularity as high oil prices push commuters out of their cars and into public transport.

Statistics from the Department for Transport indicate the rate of car usage has fallen every quarter in the last year from a high point of annualised growth of 4% seven years ago.

While a more environmentally-friendly demographic may be emerging in the UK, the soaring cost of oil is undoubtedly a major motivator.

And despite slight falls in the use of oil in the UK and US, developing economies are predicted to continue to fuel higher demand for years to come.

Tony Hayward, chief executive of oil giant, BP, recently said: 'The defining feature of global energy markets remains high and volatile prices, reflecting a tight balance of supply and demand.'

Investing in oil instead of filling up the car would have delivered a 34% return in the past six months. But can oil price rises continue and how should you invest?

The price of a barrel of crude has hit all-time highs of more than $140 a barrel since the turn of the year.

If a motorist had taken the £60 cost of filling up once a fortnight, from January to the end of June, and placed it in a fund tracking the price of oil instead, they would have seen handsome profits.

With a £60 fill-up every two weeks, in the first six months of 2008 the typical family car would have used £780 worth of fuel.

If a driver had ditched the motor and taken that £780 and invested it in the ETFS Securities Brent 1 Month exchange traded fund, it would have rocketed by no less than 34% to £1,034, over the same period.

But after peaking last week, prices of oil have slipped back and been flatter over the past seven days. US crude has remained near $135 a barrel and at one point oil fell as low as $132, more than 10% below the record $147.27 reached on 11 July.

Overall the price of oil has been on an upward trend for more than six years now - the longest period of rising prices on record.

Train and bus operators are enjoying a surge in popularity as high oil prices push commuters out of their cars and into public transport.

Statistics from the Department for Transport indicate the rate of car usage has fallen every quarter in the last year from a high point of annualised growth of 4% seven years ago.

While a more environmentally-friendly demographic may be emerging in the UK, the soaring cost of oil is undoubtedly a major motivator.

And despite slight falls in the use of oil in the UK and US, developing economies are predicted to continue to fuel higher demand for years to come.

Tony Hayward, chief executive of oil giant, BP, recently said: 'The defining feature of global energy markets remains high and volatile prices, reflecting a tight balance of supply and demand.'