A Soft Commodity Index Perspective
Mainstream indices have a soft commodity index component as part of their overall diversification across this growing asset class.
Bearing in mind that a soft commodity is generally considered to be one that is grown as opposed to mined or extracted, then this covers potentially a number of commodities we use today.
With the recent surges in food commodity prices which led to a high profile UN summit in Rome to address the growing crisis, the supply and demand dynamics of soft commodities have moved up the plitical agenda.
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Some commodity indices include most of the softs, such as the Rogers International Commodities Index (RICI), while others like the Dow Jones AIGCI and S&P GSCI have fewer. If you would like to have exposure to specific soft commodities you could consider investing in funds which track commodity sub-sector indices.
And if you wanted more specific exposure to say one of these individual soft commodities, there are funds to track their price movement too.
So for this approach softs can include the grains, oilseeds, coffee, cocoa, lumber, rubber, butter, orange juice and wool, among others.
So how do the various indexes reflect the price of soft commodities?
Take, for example, the S&P GSCI (Goldman Sachs) Composite index and we see that agriculture (or softs) represents (as at 11 June 2008) 11.51% of the index value.
The largest components of this sector in the S&P GSCI are the grains, with two grades of wheat, Chicago (3.05%) and Kansas City (Red Wheat) at 0.73%, corn(3.61%) and soybeans(2.03%). Cotton No.2 (0.69%), coffee “C” (0.45%) and sugar No.11 (0.74%) make up the balance in an index which is heavily weighted towards the energy sector.
It is possible, however, to track one of the S&P GSCI indices with a reduced energy content including one with no-energy and metal commodities included, with the exposure correspondingly increased to softs.
Here, for example, Chicago Wheat (21.27%) and Corn (25.17%) are the largest shares in the agriculture and livestock index.
As with the Goldman Sachs index, the DJ AIGCI covers the main grains, with wheat, corn and soybeans the top three in the agricultural (softs) sub-sector.
While this index includes coffee (3.0%), sugar (3.2%) and cotton (2.5%), there is no coverage for what are considered food staples, namely rice, barley and oats.
This is where the difference in objectives and methodology between the various indices can lead to variations in weights and actual omissions of a commodity.
The widest range of soft commodities among the main indices is to be found on RICI. With no fewer than 16 softs, ranging from Azuki beans, rice, lumber, and rubber to barley, oats and greasy wool, along with the mainstream softs represented in the other indices.
Over the longer term it is quite possible that some of the more exotic soft commodities may be included in the other indices, especially if lifestyles and economic trends change direction markedly.
Perhaps oats may be considered a healthier grain to use than wheat, or azuki beans are discovered to import a key health benefit.
Accordingly, the demand would rise and producers would over time try to meet the market need.
It is also possible that new softs could be included if they are deemed to have a growing market share.
Given the recent acute crisis and predicted long term trends in world food demand, the soft commodity index focus is likely to remain very sharp going forward.
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