So does it make sense to invest in commodity-based stocks & futures?

GREENER PASTURES Spot prices of agricultural commodities have zoomed in the last two years & so have stocks of cos involved in these products.  Aman Dhall guides you  ARE YOU the one who buys grocery and food items for your family on a daily basis and that too from a mandi? If the answer is 'yes', then you must have shared at some point in time the agony of rising prices and how it's eating into your savings with your friends or colleagues or with family members. But how many of you have ever utilised this very market knowledge of daily bargains with wholesalers to invest in commodity futures or stocks of companies that are involved in the manufacturing of commodities? Chances are there'll be very few who would have had an answer in affirmative. Commodities are considered risky yet rewarding investments, if done with proper due-diligence. Over the last two years, spot prices of agricultural commodities have sky-rocketed in India and with that the stock prices of companies involved in that too have shot up.  To help you with your investments in commodity-based stocks and commodity futures, here's a low-down on what makes better investment sense in the current scenario.  GAZE AHEAD  Less than normal monsoons have paved the way for a bumper season for the agricultural stocks on Dalal Street. These stocks have soared by over 45% on an average since June 1. With the demand scenario still buoyant, analysts believe commodity prices won't come down significantly and commodity stocks will remain steady, stable and inch upwards. "The gains,however, may not be as high as they were during the last few months," says Sudip Bandyopadhyay, CEO of Reliance Money.      Despite the monsoons picking up in the later half of the season, analysts don't see any reversal in fortunes of these stocks unless there is an uncertainty on the forecast for the next crop season. If there is a slight fear of a dull season ahead, the rally might well continue, they argue. International agricultural production too has remained on the lower side so far. "This trend can continue for some more time. Yet it is advisable that only those with a healthy risk appetite enter these stocks on declines," says Ashish Kapur, CEO of Invest Shoppe, a Delhi-based broking firm.  WATCH FOR CYCLE  For starters, trading in commodity futures is considered a leveraged position. Commodity prices move purely on the demand-supply scenario. So, financial discipline most often than not decides the outcome of your trades. Factors such as rainfall levels, sowing-harvesting cycle, government polices and macro economic outlook decide the direction in which the commodity prices move.      Analysts hold a mixed outlook for agricultural commodities for the next few months. While they are bullish on some commodities, there is a bearish attitude too for others. For instance, they expect Guarseed prices to move up due to deficient rains in Rajasthan and Haryana during the main sowing period from June to August. But on the contrary, they see soybeans prices remaining subdued with good production prospects in India and the US.      Analysts are bullish on the prospects of commodities such as coffee, rice and sugar. "Coffee has a longer gestation period as compared to tea. So the production of coffee is quite less as compared to its substitute, tea," says Kapur. On the other hand, rice demand is anticipated to grow as consumption depends on two major factors — population and income, both of which are growing in India. Moreover, due to drought in some rice growing parts of the country, the production of non-basmati rice is expected to decline. Sugar story is no different. The prices have moved up smartly in domestic as well as global markets. "Demand has grown from various countries, including Brazil. India, one of the exporters of sugar, could well become a net importer of sugar, if the shortage continues," points out Kapur.  DIVERSIFICATION GAIN  As a thumb rule, you should remember that the price of a commodity and its corresponding stock price doesn't have a direct co-relation. There are a multitude of other factors such as management quality, cash flow situation and overall market confidence, in addition to the commodity prices, that help arrive at the stock price, and thus is the difference in the level of returns. "However, if other things were equal, the commodity prices do form the most important factor in pricing commodity shares," says Jayant Manglik, president of Religare Commodities.      Given that the current period is the peak harvest season, market experts are against investments in the agri commodities.      Buying commodity stocks, they say, makes better sense as not only does one get better returns when the trend of a commodity is rising but one also pays the whole amount purchasing a share and hence is not leveraged. "High volatility in commodity prices means only those who have capacity to pay the margin calls on time gain from the uptrend. That's why buying stocks is considered a better option," explains Dilip Bhatia, director and head of Kotak Commodities.      Sensitivity of commodity prices to news flow in the short run is another drawback. On the other hand, stocks have a diversification benefit. You have the option to buy stocks of companies which have exposure to more than one commodity.      aman.dhall@timesgroup.com