Farm commodities are new stars By Tom Cahill and Feiwen Rong Bloomberg News Published: August 21, 2007
LONDON: Commodity investors may never have a better time to buy corn, cotton and sugar instead of oil and copper.
The price of sugar, the world's primary source of ethanol, is the lowest that it has ever been, relative to that of crude oil. Corn has taken its biggest drop this year since 1998 after farmers in the United States planted the biggest crop since World War II. Cotton has been the worst commodity investment over the past three years.
Goldman Sachs Group is recommending corn after correctly predicting a rally this year. According to Jim Rogers, a former hedge fund manager, and Marc Faber, an analyst who told investors to sell U.S. stocks a week before the 1987 crash, agricultural commodities are the ones to buy.
Wheat, coffee and corn outperformed almost all commodities in the UBS Bloomberg CMCI index this month. Oil tumbled 8 percent and copper fell to the lowest level since March, as loan losses hurt consumer demand.
"If we see a global slowdown developing, it won't affect agricultural commodities because people still eat," said Sean Corrigan, chief investment strategist at Diapason Commodities Management in Lausanne, Switzerland. "Steel, iron ore, nickel may suffer. But people will go to the shops to buy bread and potatoes." Today in Marketplace by Bloomberg Dubai developer cancels plan to swap shares for land Auto industry health care negotiations threatened by Chrysler Central banks to the rescue! (If they can)
The rebound in food prices is buoying inflation as financial markets weaken on subprime mortgage losses. In the United States, the Federal Reserve cut the interest rate on direct loans to banks Friday by 0.5 percentage point to 5.75 percent in an effort to revive economic growth. The unexpected reduction was the first between scheduled Federal Open Market Committee meetings since 2001.
"The Fed has recognized that we have major, major, major problems," said David Threlkeld, president of Resolved in Scottsdale, Arizona, who has traded metals for 40 years. "We have the same problems as in the subprime market. The metals markets are poised to go through the same circumstances."
Sugar's 20 percent decline this year has left it so cheap that investors can buy almost seven sugar contracts for every one of crude oil, the most in at least 20 years, based on prices on the New York futures exchanges. A ton of crude oil on the New York Mercantile Exchange today costs 2.5 times more than a ton of sugar on the New York Board of Trade. For the past decade, the two commodities traded at about the same average price.
While there is a projected surplus of 11 million tons of sugar, bad weather may cause the global stockpile to shrink, said Greg Smith, founder of Global Commodities, manager of a commodities fund based in Australia.
"The risk is now mostly in the upside, as wild weather season approaches," Smith said.
He added that storm damage might double sugar prices to 20 cents a pound, from 9.4 cents a pound as of Aug. 17 on the New York Board of Trade.
"We consume a lot of sugar both for food and now energy," Smith said, "while unfortunately the weather patterns are becoming more extreme."
Cotton, which has lagged behind the other 25 commodities in the UBS Bloomberg CMCI index since 2004, may gain because of rising sales to Chinese textile companies. Prices may rise to 67 cents a pound within a month, a 17 percent gain from the 57.5 cents on the New York Board of Trade, according to an report released Wednesday from analysts at Barclays.
Rising incomes in China and India will also sustain demand for meat, increasing consumption of corn and soybeans for animal feed.
Net income of farmers in the United States will rise by $6 billion, or 9.9 percent, to $66.6 billion this year, the U.S. Department of Agriculture forecast in February.
McDonald's plans to have at least 1,000 restaurants in China next year, up from 800 now. Yum Brands, which owns Pizza Hut, KFC and Taco Bell, plans to add 400 Chinese locations, among at least 1,000 stores opened outside the United States annually for seven straight years.
"There are three billion people in Asia who were not involved the last time we had a commodities rally and aren't going to lose their appetite because of problems in the U.S.," Rogers said. "Even if America goes bankrupt, those three billion people are going to continue to do well and eat more."
He predicted the start of the commodities rally in 1999 and his Rogers International Commodity Index has more than doubled in five years.
Faber, the analyst and investor, said prices of agricultural commodities were "still extremely low" in real terms and "look relatively attractive" because of potential weather disruptions.
"Agricultural are the most favorable, along with cotton and sugar," he said.
Faber said last week that he was concerned about excesses in "all asset prices for now."
Nestlé, Sara Lee and H.J. Heinz last week reported that profit exceeded analysts' estimates after sales and prices of their food products increased.
"We have achieved a different level on agricultural prices, and they will stay," said Nestlé's chief executive, Peter Brabeck. "It's due to the increased demand in Asia and also because of the demand for biofuel."
Shipping rates are rising because of orders for bulk commodities while oil tanker markets sink. The Baltic Freight Index, which measures the cost of moving grain and coal, is up 64 percent to a record on the Baltic Exchange this year. The cost of hauling a barrel of crude oil from the Middle East to Japan fell 17 percent during that time.
Rising fuel, fertilizer and equipment costs will drive agricultural prices higher, said James Gutman, executive director and a senior economist at Goldman Sachs in London.
Goldman forecast on March 30 that corn would rise to $4.15 a bushel in six months, from $3.745 at the time. The price jumped 16 percent to $4.35 June 18.
Gutman said a shift to higher prices "happened first with crude in 2003, we saw the same phenomenon in metals in 2005, and we're now seeing the same phenomenon in grains."
He forecast that corn would rise by 27 percent to $4.40 a bushel in 12 months from $3.4575 on Friday.
"It makes agriculture the next place to be," Gutman added.
Galahad Gold, a mining-development company in London, said Monday that it planned to start investing in farmland, crops and livestock because the market for metals was "mature."
"Demand for better quality food is being fueled by strong economic growth in many countries," said Galahad Gold, which is dropping "Gold" from its name. "The macroeconomic indicators for soft commodities have similarities to those of gold and copper when Galahad first invested in mining."
Nickel, copper and other industrial metals are the biggest losers among commodities since July 16 as concerns of a credit crunch spread from U.S. subprime mortgage-backed debt, partly because investors sold to raise money and offset losses elsewhere.
"People sell other investments to get cash, as we have seen with the crude oil market and the industrial metals markets," said Christopher Wyke, fund manager at the Schroders Agriculture Fund in London. "When it comes to agriculture, there is no connection."
Roland Jansen, chief executive of Mother Earth Investments in Lichtenstein, said that as much as 33 percent of commodities positions could be held by investors who may be forced to sell to finance margin calls. When they do, Jansen said, he will be ready to buy for his fund.
"This is a great opportunity to expand our positions in agriculture and soft commodities," Jansen said.
"We follow weather patterns much more than credit crunches."
