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Tectonic Changes: The Soft Commodity Shift

by , 28 March 2022
Tectonic Changes: The Soft Commodity Shift
In the modern age things always seem to happen quickly.

A few weeks ago, I explained how the Russian invasion of the Ukraine and the associated sanctions could potentially lead to a shift in world order. It seems this is happening far more quickly than I expected.

We have now seen firm commitments from European countries to massively increase their defence spending. We've also seen tangible moves by many non-Western countries to reduce their reliance on global financial and technical infrastructure. This seems to be pointing towards a split of the global financial system.

But, while these shifts will significantly change how the world works over the next ten years, there's another possible impact that could dwarf the rest. And it's especially relevant for anyone living on the African continent.

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The impact of the Russia/Ukraine War affects more than the energy markets, it has a significant impact on agricultural markets too

The mainstream news has focused mainly on the Ukraine-Russian war’s impact on energy markets, it must be remembered that Russia and the Ukraine are massive players in the global agricultural economy. For example, they are responsible for over a quarter of the world’s wheat exports. Potatoes, maize, barley, sunflower oil and sugar beets are just a few of the region’s other major exports.

They are also significant players in the fertilizer market. As a result, we have seen the price of many staple foods starting to increase globally.

In the developed world this is not as important as the rise in fuel prices, however in the developing world, higher food prices could result in an unmitigated disaster.

Why higher food prices could spark another round of unrest

Poor populations spend a larger portion of their income on food. They are therefore much less able to absorb a price increase. Also, unlike fuel increases, where you can get by travelling less or carpooling, poor people have very little ability to reduce their food consumption. They are usually already consuming some of the cheapest available calories. If prices go up, all they can do is reduce consumption.

Few things stimulate political unrest like food insecurity. The Arab spring uprisings of a decade ago may have been sparked by a rise in food prices. Prices are currently even higher than they were back in 2011 and they are likely to go even higher.

If we see another round of unrest, similar to the Arab Spring uprisings, it’s very possible this would act as a catalyst for much higher food prices. As you know, many developing countries have very large agricultural and mining sectors. If these are disrupted it would just compound the problem, triggering the next round of price increases. Very quickly the world could find itself in real trouble as the vicious cycle feeds on itself.


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How do you protect your portfolio

As an investor, you may want to get a few trades in place to protect yourself from such an outcome. You could explore portfolio hedging, but a much simpler way is to make sure you have capital protection by holding a few structured products. The hedging inside a structured product is generally a lot cheaper than directly using options, futures or CFDs to protect your positions.

But structured products do require a high level of scrutiny before use. There are some incredible versions of these products out there, but unfortunately the banks have also created some real garbage.

I probably wouldn’t recommend a retail investor just use any structured product.

Instead, you should run your chosen instrument through a financial advisor.
Some will shy away from structures, because they either don’t have the experience to understand the mathematics behind them, or they’re just plain lazy. Either way, if they’re not willing to do the work, you may want to consider changing your advisor.

Of course, not everyone is looking to protect their existing capital, you might want to try and use this shift in the soft commodity landscape to accelerate your returns.

If you’re instead looking to increase your risk and bag some bumper profits, you might then choose to focus on actual underlying agricultural commodities rather than food producers. Most good securities broking platforms will give you access to the soft commodities counters.

Another way to play the move is to buy commodity producers in developed countries. They’re likely to be less affected by civil unrest and with higher prices around the corner, you may just be in for windfall profits.

Tectonic Changes: The Soft Commodity Shift
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