Agricultural commodities are mainly used as food for human consumption or as raw materials for many everyday products. Many of these products are traded on commodity exchanges and play a crucial role in global trade and the economy.
There is historically little correlation with traditional asset classes such as stocks and bonds, as well as with other commodities such as energy and metals. Inflation hedging can be a key advantage of agricultural commodities, argues Benoît Harger, Commodity Portfolio Manager at private bank J. Safra Sarasin.
Examples of agricultural commodities are:
- Grains: maize, wheat, barley, oats, sorghum, rice
- Oilseeds: soybeans, rapeseed, sunflower
- Soft commodities: sugar, coffee, cocoa, cotton, orange juice, lumber
- Tropical oils: palm oil, coconut oil
- Livestock: lean pigs, cattle and feedlot cattle
- Dairy: butter, whole milk, skimmed milk, whey
How are they used?
Agricultural products are used as food, but also in cosmetics and clothing. In terms of volume, the main use of agricultural commodities is still animal feed. More recently, industrial use and the growth of biofuels as a source of energy have dramatically changed the asset class.
How do the supply dynamics work?
On a global scale, the supply volumes of agricultural commodities vary widely, affecting global production. For instance, world maize production in 2024 is expected to reach 1229 million tonnes, while cocoa production in 2023 was only 4.3 million tonnes.
Different agricultural products need to be grown specifically, and so farmers adjust their practices based on factors such as weather, crop rotation and market demand.
The local climate also has a major impact on crop yields and quality. Some countries manage to harvest certain grains twice a year. Certain commodities – especially arabica coffee and cocoa – require growing in specific conditions. The opposite seasons in the northern and southern hemispheres mean that crops are available all year round. Nevertheless, agricultural prices reflect seasonal patterns.
Innovation and technology
Input costs, prevailing market prices and hence profitability play a major role in a farmer’s decision to increase or replace production of a particular crop. Innovation and technology have significantly improved yields and optimised crops, consistently increasing supply.
In addition, sustainable and environmentally friendly farming practices are increasingly being adopted to minimise impacts on ecosystems and promote long-term agricultural sustainability.
This complex interplay of factors influences the supply of agricultural commodities, but their relative importance depends on the crop, location and market conditions.
What drives the demand for agricultural commodities?
Demand for agricultural commodities has changed over time due to population growth, cultural and culinary patterns, changing eating habits, economic development, technological advances and globalisation.
Globally, there has been a shift towards higher consumption of animal products – such as meat, dairy and eggs – which has led to higher demand for feed crops and livestock.
Today, 40% of maize production, 98% of soybean production and 18% of wheat production go to animal feed. Cultural changes towards more sustainable eating habits mean that per capita meat consumption is at its peak in the West, although demand is still growing rapidly in emerging markets.
The growth of biofuels and the use of agricultural raw materials in industrial processes have driven the demand for agricultural products. The production of ethanol from maize or sugarcane, for example, has increased demand for these crops.
What is the role of agricultural commodities in investment portfolios?
Agricultural commodities have historically been less correlated with traditional asset classes such as stocks and bonds, as well as with other commodities such as energy and metals. Moreover, there is little correlation with other agricultural commodities because they are used in so many different ways.
Agricultural commodities in particular can also serve as an inflation hedge. When inflation rises, agricultural commodity prices often rise too, as production and transport costs tend to rise.
