Stock-wary investors buy the farm

Investors battered by the most severe stock market slump in decades are moving away from shares and looking for safer alternatives.

Most big investment funds have diverted a proportion of their clients' cash into bonds, while many smaller investors have moved into property.

However, some refugees from the equities slump may find relief from a more unusual source - internationally traded agricultural products such as cocoa, coffee, sugar and wheat, collectively known as "soft" commodities.

Persistently low prices punctuated by bouts of extreme volatility have traditionally made these markets a no-go area for all but the most hard-bitten specialists.

But the prospect of smaller harvests has pushed up commodity prices for the first time in five years, making wheat, coffee and cocoa look attractive compared with shares.

Bouncing back

The Economist Intelligence Unit (EIU) said in a report last week that prices of soft commodities had "recovered strongly" this year, and would continue rising until 2004.

According to EIU analyst Matthew Parry, stronger commodity prices often attract interest from speculative investors, especially when stock markets are weak.

"If you look back historically, you will often see an inverse relationship between commodity markets and equity markets," Mr Parry told BBC News Online.

Oil and gold are the best-established "safe haven" commodities when shares fall, and both have risen sharply in price this year.

But there are signs this time that lower-profile agricultural products are getting a look-in too.

In London, investment firm Odey Asset Management has said it is keeping an eye on soft commodity futures while equity markets remain weak.

And on the Chicago Board of Trade, the world's biggest agricultural commodities exchange, the average daily number of wheat future transactions in September was up by three quarters compared with the same period last year.

Future hope

Alistair Dickie, director of UK-based grain market consultancy HGCA, pointed out that technological innovations have made commodity markets accessible to a wider range of investors.

"There is a philosophy that says that commodities are counter- cyclical to the stock markets, and electronic exchanges have reduced the transaction costs of trading in them," he said.

Speculative investors in farm commodities typically buy futures - contracts entitling them to buy the underlying product at a specified price on a specified date.

These contracts were originally designed to protect buyers and sellers from weather-induced price fluctuations, but are now traded in their own right.

This allows investors to cash in on a rising market without the expense and inconvenience of owning tonnes of grain or coffee.

Cocoa booms

While commodities may for the moment keep their value better than equities, they do not as a rule match the spectacular returns generated when stock markets are buoyant.

There are exceptions, however.

Earlier this week, the price of cocoa soared to more than £1,600 a tonne - its highest level in nearly 17 years - due to weak harvest expectations and civil unrest in Ivory Coast, the world's biggest producer.

London-based trading company Armajaro, which is believed to have bought up about 150,000 tonnes of cocoa beans earlier this year in anticipation of supply shortages, is expected to be the chief beneficiary.

Cocoa prices could rise even further as big chocolate companies such as Cadbury Schweppes and Nestle start stocking up on beans ahead of the Christmas season.

A sustained rise in coffee, cocoa and sugar prices would also benefit producers, many of them based in developing countries.