Focus: The blog post explores how trading commodities, particularly agricultural commodities, can help people hedge against inflation.

Inflation is a major global problem. Nearly all countries of the world are witnessing a rise in inflation due to increased food and energy prices resulting from the Russia-Ukraine conflict. Global inflation is projected to climb to 7.4% in 2022 from 4.7% in 2021. The situation is particularly tense in North and West Africa, and Nigeria is no exception. Nigeria’s inflation rate surged to 17.7% in June, a five-year high.

Inflation is like a pest that eats your money. The Oxford dictionary describes it as ‘a general increase in prices and a fall in the purchasing value of money.’ A simple definition of inflation offered at an elementary economics level is ‘when too much money is chasing after few goods.’ Whatever definition you find easier to go with, the impact is uncontested - that is, when inflation is on the increase, it essentially signifies that your money will not go as far as it formerly did.

So, how do you preserve monetary value and beat inflation at its own game? One of the ways to hedge inflation is by investing in commodities. Investment in commodities always gains interest when inflation rises. Research shows that commodities (commodities are produced or extracted products, often natural resources or agricultural goods, that are often used as inputs into other processes) are one of the asset classes most positively correlated with inflation. Commodities are not the primary cause of inflation but are a significant factor in its rise, and this link makes commodities an automatic effective inflation hedge. In particular, agricultural commodities have been tipped as one of the best commodities to trade now.

The rising prices of grains and oilseeds and the plethora of supply-side issues due to the Russia-Ukraine war have pushed up agricultural commodity costs. Agricultural commodities are up 26.8 percent at a time when global equities have declined by approximately 13.88 percent due to rising inflation and tightening liquidity circumstances.

Here are a few reasons why these agricultural commodities counter inflation.

• Traditional asset types, such as equities and mutual funds, have a limited correlation with commodities. This indicates that if the price of equities falls, the price of commodities will increase.

• The supply-and-demand dynamics have a substantial impact on commodities as well. For instance, if there is a large harvest of a particular crop, the price of that crop typically decreases. In contrast, fears that future supply would be disrupted by drought or flooding might cause prices to rise.

• As the demand for various items rises, so does the demand for the commodities used to manufacture them, increasing commodity prices.

While trading commodities can be very good, you should know a few things before investing in commodities.

As highlighted earlier, commodities are heavily dependent on supply and demand. Some agricultural commodities may not perform well during economic downturns as people might consider cheaper alternatives. For instance, due to the war in Ukraine, many countries have resorted to getting alternatives to wheat. The Cameroon government is encouraging local substitutes like cassava and yams to replace the wheat usually imported from Russia and Ukraine.

Also, the commodity market is quite volatile, which sometimes leads to underperformance. Because the supply and demand characteristics change frequently, volatility in commodities tends to be higher than in stocks, bonds, and other types of assets.

To trade agricultural commodities, you need proper education on the commodities you need to trade at what time and also to be able to diversify your portfolio - AFEX is happy to help with that - we make available daily data on how each commodity is being traded on the Exchange performs and also do periodic live sessions to educate investors. You can visit the ComX by AFEX page to trade and invest in commodities. ComX is Africa's first commodities trading app.