funds eyeing grains

A YC prediction! Funds to exit metals as the miners look to lock in record prices and head straight for the food/fibre complexes.

Two interesting newspieces here! ;)


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LONDON, Feb 7 (Reuters) - Investment banks are looking for a strong price performance in commodities such as grains and sugar in 2006, but investors will need to target these markets with care due to the prevailing price structure.

Barclays Capital said in a weekly investor report that it expected another step up in the rate of spot price appreciation in agriculture indexes in 2006.

Although spot prices registered larger percentage gains in 2005 than 2004, returns were disappointing as prices for immediate delivery were lower than delivery for the future -- a situation known as contango.

"For investors targeting the agriculture sector in 2006, a crucial issue is how to benefit from rising spot prices without seeing potential gains eroded by the high cost of carry," Barclays said.

Investors in indexes make money through a concept called the roll yield, whereby they sell the spot contract and buy the future contract hopefully at a lower price.

In a separate report, Deutsche Bank noted that the persistent contango prevailing in crude oil was undermining investors' buy-and-roll strategy.

"Aluminium and gold are beginning to take over the role of energy as the engine room of performance in a long commodity index strategy," the bank said in a monthly report.

Barclays advised investing in products that not only had potential for gains in spot prices, but also for long periods of backwardation in future price curves.

It was most bullish on sugar, followed by wheat -- notably the Kansas City Board of Trade's hard red winter wheat contract <0#KW:>.

"Cotton is another agricultural commodity we expect to rise in 2006 on the back of strong Chinese import demand to feed its burgeoning textile industry," Barclays said.

Deutsche noted that both corn and wheat returns had posted two consecutive months of positive returns by the end of January 2006 for the first time since March 2004.

The China factor was again cited as a potentially bullish factor, with Deutsche remaining convinced of rapid price gains as China moves to become a net importer of corn over the next 12 months.

"The recent rise in corn prices may well be heralding tentative investor positioning of a turn in this market."

((Reporting by Clare Black; editing by Michael Roddy; [email protected]; RM: [email protected]; +44 (0)20 7542 4985))

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By Eric Onstad

CAPE TOWN, Feb 7 (Reuters) - Many mining companies are now hedging to lock in record high prices, investment bank Barclays Capital said on Tuesday, as it warned that prices were poised to decline if hedge funds started selling. A top executive of mining group Anglo American Plc said prices were likely to remain strong on buoyant global demand from players like China.

Gerald Holden, managing director of mining and metals at Barclays Capital, cautioned that speculative hot money flowing into commodities markets could pull out if the shortages of industrial metals like copper seen in recent years started to reverse.

"An inability of supply to adjust to rising demand has been the basis for the spectacular performance of commodity prices," he told the Indaba African mining conference in Cape Town.

"However, a note of caution as we believe that supply will start to catch up with demand very soon with potential oversupply becoming a negative influence on prices."

Fundamentals were still strong for industrial metals with more upside expected in the short term, but peak prices were expected to be hit towards the middle of this year and prices would likely revert to long-term historic averages by 2008-2009, he added.

In the gold market, which has been touching fresh 25-year highs in recent weeks, the scenario was more fragile since it was overwhelmingly fuelled by speculative demand.

"In the case of gold, while short-term speculators may remain committed as long as the upward momentum continues, once the rally stalls there is a danger that the downward correction will be swift and brutal."


GOLD SEEN SLIDING

Holden forecast that gold prices would peak around current levels, then move back to around $350-$375 per ounce in the medium term. Spot gold was trading at around $567 an ounce on Tuesday morning.

Many clients were taking advantage of the red-hot prices to hedge -- selling in advance at fixed prices -- to guard against any slide in prices, he said.

"We already seen some of our more enlightened clients approach this strategy with recent risk management executed in gold, silver, copper, nickel, lead, aluminium and zinc with time periods in excess of 10 years and often in significant size."

He did not name any of the firms that have been hedging.

Some very vocal investors oppose hedging, especially in the gold sector, arguing that firms should be exposed to current high spot prices.

Another speaker at the mining conference seemed unworried about the potential for declining prices.

Lazarus Zim, chief executive of the South African unit of Anglo American, said the supply-demand balance in global commodity markets seemed to be undergoing a fundamental shift towards higher demand.

"All indications are that the current prices will be in place for much longer than many had estimated in the past... It is quite clear there has been a fundamental shift in demand so that puts us in a very good position here in Africa."

((Editing by Tony Austin; Reuters Messaging: [email protected]; E-mail: [email protected]; +27 11 775 3157))