Interview with Jim Rogers: "The best place to be is in commodities"
Interview with Jim Rogers: "The best place to be is in commodities"
Consensus Commodity Price Forecasts:
Catching the commodities wave
Investors cite 1920s theory in saying that the rally in commodity stocks is only just beginning
By MALCOLM SCOTT
RUSSIAN economist Nikolai Kondratiev argued in the 1920s that commodities move in 50 to 60-year cycles. His analysis suggested prices would rise early this century. They did.
Now, investors Shane Oliver and Marc Faber are using his theory to back their bets that the five-and-a-half-year-old rally in commodity-related stocks is only just the beginning.
'The norm in financial markets is to look at very short-term cycles,' said Mr Oliver, who helps oversee US$83 billion at AMP Capital Investors in Sydney. 'I think that's wrong. Kondratiev allows you to view these things in a broader context.' BHP Billiton Ltd, the world's biggest mining company, and Rio Tinto Group, the third-largest, are among AMP's top 10 holdings.
Shares of companies that produce raw materials have leaped 173 per cent and energy stocks have jumped 118 per cent since October 2001, when commodity prices began rising. The two groups have had the biggest gains in Morgan Stanley Capital International's World Index since then. Shares of Melbourne-based BHP have almost quadrupled, while those of London-based Rio have almost tripled.
Mr Oliver and Mr Faber, a Hong Kong-based money manager, are among a new generation of 'super cycle' proponents that also includes strategists at Citigroup Inc, Deutsche Bank AG and Goldman, Sachs & Co. They say that supply shortages and growing economies in China and India will send prices higher for years to come.
Their intellectual ancestor, Kondratiev, founded the Institute of Conjuncture in Moscow in 1920. He argued in books and papers such as The Major Economic Cycles, published in 1925, that long waves in economies and prices are inherent in the capitalist system. Upswings are caused by increased capital investment, and downswings arise as those investments lose value. New markets and new technologies also push prices up during the expansionary phase.
He observed three upswings: 1789 to 1814, spanning the French revolution and Napoleonic wars; 1849 to 1873, an era of European industrialisation; and 1896 to 1920, when the US emerged as the world's largest economy. Each was followed by a commodities decline of between 23 and 35 years. The average decline lasted 29 years, the average upswing 24 years.
Using Kondratiev's analysis to project forward, a 29-year slump was due from 1920 to 1949 - a span that includes the Great Depression and World War II. A full 53-year up-and-down cycle followed, making another upswing due in 2002.
'I agree that commodity prices move in long cycles,' said Mr Faber, who manages US$300 million at Marc Faber Ltd. 'The up wave of the Kondratiev cycle is likely to last for at least another 15 to 20 years.'
Mr Faber devoted a 35-page chapter of his 2001 book Tomorrow's Gold to Kondratiev and other long-wave theorists, writing that once the cycle turned higher, 'it will change the entire rules of investing, because in a rising wave, commodity prices will rise, inflation will accelerate and interest rates will increase'.
The Reuters/Jefferies CRB index of 19 commodities has surged 139 per cent since October 2001; copper has jumped fivefold, while oil prices have more than tripled. The US Federal Reserve has raised its benchmark interest rate to 5.25 per cent, from a low of one per cent in 2003.
Mr Faber owns mining stocks, which he declined to name, as well as gold, rare metals and agricultural land. He's underweight in bonds, which he said don't perform well in a rising Kondratiev wave.
The best-performing commodity related stocks since the rally started include Phoenix-based Freeport-McMoRan Copper & Gold Inc, up 505 per cent; Valero Energy Corp of San Antonio, up 647 per cent; Seoul-based Korea Zinc Co, up 988 per cent; German steelmaker Salzgitter AG, up 1,247 per cent; and Indonesian coal exporter PT Bumi Resources, up 2,100 per cent. The MSCI World Index is up 67 per cent in the same period.
Angus Gluskie, who helps manage about US$380 million at White Funds Management in Sydney, hasn't heard of Kondratiev and isn't a believer in the long rally. He expects central banks around the world will raise interest rates in the face of higher inflation, slowing global growth and demand for raw materials.
'Things don't go on forever,' he said. 'The reason these things are called cycles is because they run out of steam. In the next six to 12 months, I see a much tougher environment for commodities and resources companies.'
That means that commodities may already have peaked. The CRB index has slipped 10 per cent from its May 2006 high. Mr Gluskie said he's 'neutral' on mining stocks, expecting strong earnings for the first three months of this year. Beyond that, he's 'anxious' not to be left owning too many shares exposed to the global economy, he said.
Proponents of a super cycle, including Alan Heap at Citigroup in Sydney, Melbourne-based Peter Richardson and London-based Michael Lewis of Deutsche Bank, and Goldman's Jeff Currie in London, say the pullback since May is just a blip in a longer rally.
Australia's central bank shares their optimism. 'The rapid growth in world demand for metals and other resources appears to be showing little sign of abating,' the Reserve Bank of Australia wrote in its monthly bulletin published April 19.
'There are good reasons to believe that strong demand, from emerging economies in particular, may continue for several decades.'
China's economy has grown tenfold since the late 1970s, when leader Deng Xiaoping began adopting market-based policies. It has grown an average 9 per cent annually for the past decade, fuelling demand for copper, iron ore and other commodity imports it needs to sustain its manufacturing-based expansion.
India's economy has grown an average 8.6 per cent annually in the past four years, the quickest pace since independence in 1947 and behind only China among the world's major economies. Goldman Sachs expects India's growth to average 8 per cent a year until 2020.
Kondratiev himself didn't profit from his analysis. He was convicted for championing private farm ownership in the 1930s and executed during Josef Stalin's great purge in 1938 at the age of 46. Joseph Schumpeter, an Austrian economist, pursued Kondratiev's ideas in the 1930s.
AMP's Mr Oliver, when making presentations to clients, includes a slide titled The Latest Long Wave Upturn, inspired by Kondratiev. Its saw-tooth graph traces the global economy since 1785, with wave points marked at 40 to 60-year intervals. A red dotted line continues north until 2020.
'A lot of people at my level see it as hocus-pocus stuff, only slightly better than charting,' he said. 'But it is something you can't ignore.'
Source: Bloomberg, May 2007
And then you have an article like this, straight from Bloomberg as well. Who knows what to think...
Metals Bubble Poised to Burst on Increasing Supplies (Update3)
By Millie Munshi
May 7 (Bloomberg) -- Copper, nickel and lead, the best performing commodities in the past four months, may be the worst by year-end.
On Wall Street, the chorus is getting louder that rising metal supplies are outpacing demand. From Goldman Sachs Group Inc. to JPMorgan Chase & Co. to Societe Generale, there are warnings of a mania that is showing all the signs of a climax.
``This is a real bubble,'' says metals trader David Threlkeld, who first got the world's attention in 1996 when he showed that Sumitomo Corp.'s copper hoarding would lead to a market collapse. Once again, ``we have an enormous amount of unsold copper,'' says Threlkeld, president of Resolved Inc. in Scottsdale, Arizona.
The metals bears are convinced that consumption may drop partly because China, the biggest user, is attempting to reduce investment through interest-rate increases and lending curbs after the economy expanded 11.1 percent in the first quarter.
Demand is also weakening because of a slowing U.S. economy and a consumer-driven pursuit of alternatives to historically expensive copper and nickel, according to Stephen Roach, chief economist at Morgan Stanley, the second-largest securities firm by market value.
Copper will decline 30 percent to an average of $5,650 a metric ton in the fourth quarter from more than $8,000 today, according to the median of 12 analysts' forecasts compiled by Bloomberg. Nickel and lead will drop about 50 percent from record prices reached on May 4 to $24,450 a ton for nickel and $1,000 for lead, the data show.
The anticipated slump would depress exports from Australia, Canada and Chile, wipe out more than $22 billion on the London Metal Exchange and squeeze the profits at mining companies from BHP Billiton Ltd., the largest in the world, to OAO GMK Norilsk Nickel, the biggest metals producer in Russia.
Bears Miss Rally
To be sure, many of the bears were wrong so far this year. An investor who acted on the advice of JPMorgan, the third- largest U.S. bank, missed gains of 67 percent for nickel, 30 percent for copper and 41 percent for lead, the best-performing commodities in the 26-member UBS Bloomberg CMCI Index.
That compares with a 6.2 percent increase for the Standard & Poor's 500 Index and 2 percent for U.S. Treasuries, according to Merrill Lynch & Co. indexes.
``We're sticking to our guns'' because ``prices are unsustainable,'' said London-based Jon Bergtheil, head of global metals strategy at the bank, on May 2. Nickel may average $35,328 a ton in 2007, down from $51,600, because stainless steelmakers might buy less in the second half, he said.
Bergtheil in February said that nickel would decline 25 percent in 2007. The metal, used to make stainless steel, has since gained 40 percent.
Nickel may plunge to $30,000 a ton by the end of 2008, because the current level is ``overdone,'' Goldman Sachs analysts led by James Gutman in London said in an April 2 report. ``There is a risk of longer-term demand destruction.''
Stainless-steel producers are canceling orders, he said. His colleague in London, Jeffrey Currie, head of global commodities research, was less bearish last week, saying he expects metals prices to be ``trading sideways'' this year.
The record copper price of $8,800 a ton reached last May was the peak, said ABN's London-based analyst Nick Moore. He recommended selling copper in December because global supplies were growing. He declined further comment in a May 3 e-mail, saying he couldn't discuss changes to price estimates before they were published. Copper for three-month delivery ended at $8,320 a ton in London on Friday.
World supplies of copper outpaced demand by about 50,000 tons in the first quarter, Stockholm-based copper producer Boliden AB said May 3. Global output rose 8 percent in the period, twice as much as demand, the company said.
Chile, the world's biggest supplier of the metal, said production jumped 13 percent in March as high prices encouraged miners to increase supply. Output rose to 502,106 tons from 442,410 tons a year earlier, the Santiago-based National Statistics Institute said April 26.
Nickel stockpiles tracked by the London Metal Exchange, the world's largest metals bourse, rose almost 60 percent since dropping on Feb. 6 to 2,982 tons, their lowest since July 1991 and barely enough to supply the world for a day.
Lead inventories are also rising, gaining by 42 percent since March 13 on the LME, to 43,825 tons. A surplus of 25,000 tons of lead may exist next year, from a deficit of 35,000 tons forecast this year, Natixis Commodity Markets Ltd. said in a quarterly report on May 1.
The metal's record price is likely to trigger more exports from China, said Natixis, one of 11 companies trading on the floor of the LME. Lead for three-month delivery ended at $2,115 a ton in London last week.
Some of the world's biggest users of metal are finding ways to reduce consumption. Pohang, South Korea-based Posco, the world's fourth-largest steelmaker, said April 25 it will increase output of nickel-free stainless-steel fivefold next year. Nickel helps make steel corrosion-resistant.
Morgan Stanley's Roach, who will soon become the bank's chairman in Asia, says commodities are poised to crash in the same way they did in May 2006, when a 5.4 percent weekly decline in the Reuters-Jefferies CRB Index was the biggest tumble since December 1980.
``Watch out below for yet another reversal of commodity froth,'' Roach said April 26. ``It's deja vu spring of 2006.'' He correctly predicted the slump in commodities 12 months ago.
Roach anticipates a drop in commodities because China will increase interest rates to slow the economy and inflation, while a slowdown in U.S. housing will rein in consumer spending.
China ordered banks on April 29 to set aside more money as reserves for the seventh time in 11 months to try to prevent the world's fastest-growing major economy from overheating. Lenders must put aside 11 percent of deposits starting May 15, up from 10.5 percent.
The increase will draw 170 billion yuan ($22 billion) from the financial system. China raised borrowing costs three times since April last year, and will increase rates twice more this year, according to a Bloomberg survey
In the U.S., the world's biggest economy, growth slowed to a 1.3 percent annual pace in the first quarter from 2.5 percent in the fourth. An index of pending sales of existing homes fell 4.9 percent to the lowest level in four years in March, the National Association of Realtors said.
`Boom in Demand'
Bullish metals investors expect China will fail to curb growth, according to Tony Dolphin, director of strategy and economics at Henderson Global Investors in London, which oversees about $125 billion.
``The speculative element in commodities hasn't been affected by the slowdown in the U.S. economy,'' Dolphin said. ``The expansion we're seeing in China and India has kept the speculators in.''
Even the largest U.S. pension fund, the California Public Employees Retirement System known as Calpers, is chasing commodity returns after years of holding stocks and bonds. The fund in March invested $450 million in the Goldman Sachs Commodity Index.
``Strength in commodity markets will be something we should see generally over the next 10 to 20 years,'' said Russell Read, the chief investment officer, in an April 24 interview. ``We see a relative shortage of commodities stemming from a boom in demand from emerging markets, particularly India and China.''
Any further gains will be fleeting, according to Societe Generale's head of commodities research, Frederic Lasserre. He expects commodities will extend their rally and rise close to near-record levels in the third quarter of this year, before falling back.
The gains in metals are ``100 percent-driven by funds,'' said Resolved's Threlkeld. ``At some point the funds are going to want to take a profit. And when that happens there could be an almighty crash.''
"Don't Fight City Hall when you can BE City Hall"G. Edward Griffins
Inventory level is a crucial factor in my view.
With the low inventory going lower, hence metal price going higher, that does not justify the definition of a bubble.
Friday, May 18, 2007. 6:34pm
Yet the Dow continues to climb to new heightsResources sector weighs down market
The Australian sharemarket has been weighed down by heavy losses in the resources sector.
Plummeting base metal prices have shaved 2 per cent off the world's biggest miner BHP Billiton.
It closed down at $30.71 while its rival Rio Tinto slumped $1.39 to $90.91.
Qantas chairman Margaret Jackson has ended a week of speculation and announced she will step down at the company's annual general meeting later this year. Ms Jackson was under pressure to resign from shareholders and unions for her ardent support of the failed $11 billion takeover bid. She says the last eight months have been particularly testing and it is a good time to move on. Qantas board member and Publishing and Broadcasting Limited chairman James Packer is also retiring at the AGM. Qantas is down 3 cents to $5.22.
Nine Network chief executive Eddie McGuire is also stepping down after 19 months in the top job. Analysts say he was not able to lift the ratings or cut costs enough, but Mr McGuire will stay with the network as an on-air personality. The chief executive role will not be replaced. PBL is down 6 cents to $20.94.
The retail sector is lower today. Grocery chain Woolworths has lost 2 per cent to $28.22, and furniture company Harvey Norman is 11 cents lower at $5.26.
Telstra has shed 9 cents to $4.86.
Three of the big four banks improved a little. The NAB was the exception, dropping 21 cents to $42.98.
The All Ordinaries Index is down 50 points to 6,320.
The ASX 200 has fallen 53 points to 6,312.
At 5:00pm today, a barrel of West Texas crude oil was $US 64.80 a barrel and spotgold was $US656 an ounce.
Over a longer term, I'm still bullish on base metals.
I'll be buying more mining stocks when metal prices come down further.
But currrently will still recommend my clients to short copper on rebound &
also to sell copper call options, strike $8200, Jun07 contract.
Last edited by BREND; 19th-May-2007 at 12:43 PM. Reason: Adding more details
Must read: Major report on the global trends in the mining industry - 2007
Ah thats better
A mid-year look at commodities
Author: RiskCenter Staff
The Dow Jones-AIG Commodity Total Return Index is up six percent so far this year. Leading commodity analysts provided their market outlook for the rest of 2007 yesterday morning at the sixth annual Dow Jones Indexes – AIG Commodities Outlook, hosted by CME Group, a CME/Chicago Board of Trade Company.
“Global demand for oil is expected to rise by 50% in the next 25 years. In China the demand is at record highs and will continue to rise. A strong stock market coupled with a weak Dollar suggests that demand here in the U.S. will grow steadily for the remainder of year. It is unclear whether conventional supplies can keep pace, and I predict oil prices will hit a new record high of $85/barrel before the end of 2007,” said Phil Flynn, vice president and senior market analyst at Alaron Trading Corporation in Chicago.
“There are several key economic factors that are driving agricultural futures and prices upward. The demand for U.S. exports is very strong as our agricultural products are now very competitively priced, primarily due to the weakness of the Dollar. The U.S. government has mandated increased use of ag-based fuels such as ethanol and biodiesel, and changes in government spending and taxation will ultimately promote greater inflation. At the moment wheat is the high flyer due to weather problems here and in Europe, but prices overall should stay strong into 2008.” said Jack Scoville, Vice President of Price Futures Group in Chicago.
“The gold market is expected to be well supported through year-end, with a move into the $700-$732 range anticipated. While occasional quick liquidations are possible, they will likely be tied to the latest round of sub-prime fears rather than any bearish gold-centric news. Gold may experience an increased correlation with the stock market as a result. Longer-term, however, gold should find support from a return of fund and investment flows, moderate global economic growth, seasonal jewelry demand, a weak dollar, and technical issues,” said Tom Pawlicki, precious metals and energy analyst at MF Global in Chicago.
“We have seen continued interest from investors in the commodities futures market. This interest has been driven largely by the growing understanding of the importance of diversifying one’s portfolio by blending together different asset classes. The Dow Jones-AIG Commodity Index has continued to serve as a useful benchmark for these investors with an estimated US$38 billion as of the end of the second quarter tracking the Dow Jones-AIG group of commodity indexes on a global basis,” said Daniel Raab, managing director at AIG Financial Products Corp.
Gold is the place to be
Rankings of gold and silver companies listed in US stock markets
China Economic Review
A movement into the gold market is seen as a means of diversifying China’s US dollar holdings
As the US dollar weakens, China’s stock of dollars and dollar-denominated debt is falling in value. Unwilling to be caught holding the bag, bankers have been seeking ways to reduce their risk. In any other currency regime, this rebalancing would be simple: swap dollars on the open market. But Beijing’s restricted system forbids this.
China’s export-dependent economy thrives on an artificially strong dollar and a relatively weak yuan. Lack of faith on the part of the world’s largest buyer of dollars could trigger a run against the US currency and hurt China’s export sector.
Local economists have seen the writing on the wall and are calling on the government to identify alternatives. One of them is gold.
“More gold reserves will help the government prevent risks and handle emergencies in case of future possible turbulence in the international political and economic situation,” said Yan Tanling, a researcher at the Bank of China.
Gold currently accounts for 1.3% of China’s foreign currency reserves, according to the Beijing Gold Economy Development Research Center. For some years now, experts have been petitioning the central bank to increase this from 3 to 5% of reserves. Such a move would bring China’s gold holdings more in line with global averages.
To do this, China would have to lay its hands on an additional 2,500 tons of gold at today’s prices – an amount equal to nearly a quarter of America’s own mammoth reserves.
“It’s impossible to do something like that over a short period of time,” said Paul Walker, head of the World Gold Council, an advocacy group.
There may also be supply issues. Bill Murphy of LeMetropole Café, a gold-industry think tank, said the current gold market would be hard-pressed to meet the needs of a Chinese buying binge.
“There is no way the Chinese could buy anywhere near that amount of gold without sending the gold price bonkers.”
That is, unless China can leverage its own domestic gold resources to support its reserve rebalancing. Several prominent mining firms made share offerings this year as part of efforts to bring forward consolidation in the sector.
Meanwhile, the country’s economic planners have also announced a significant expansion of China’s existing gold mines in the past year. Production is expected to top 260 tons in 2007, so China may well have the domestic supply in place to expand its gold reserves.
There are signs that Beijing may be putting in the structures required to support this. In June, the China Securities Regulatory Commission gave the Shanghai Gold Exchange the green light to begin trading gold derivatives futures.
Another factor is, paradoxically, the current low price of gold. A large buy by China would likely create a major price spike as investors anticipate a tighter market. This would see the value of their reserves appreciate.
Rather than embark on a risky commodities drive, many prefer the more subtle technique of using the dollars to invest in US securities. Buying into American firms would reduce currency risk and boost returns while avoiding the appearance of abandoning the troubled dollar. Indeed, this is the principal objective of China’s recently established first state-owned foreign investment agency.
However, the new agency is likely to operate in a conservative manner and, even if it did not, bold takeover efforts would face stiff opposition in the US.
As it stands, gold may not be an immediate fix for China’s reserve imbalance but it is a viable option. Walker remains convinced that gold will be part of whatever exit strategy China chooses.
“There’s no doubt in my mind at all that they will be in the [gold] market. I would expect to see baby steps towards gold in the future.”
U.S. Housing: Bullish Or Bearish For Commodities?
BCA Research (Canada)
August 10, 2007
Our Commodities and Energy Strategy service maintains its positive outlook on the commodity complex, but advises that investors steer clear of housing-related assets such as lumber and copper.
While commodities linked to housing such as lumber and copper remain under downward pressure as a result of the ongoing strain on the U.S. housing and mortgage markets, the overall climate for commodities is healthy. Weakness in the U.S. housing market could be viewed as bullish for commodities because it caps the cost of capital. Outside of the U.S., plentiful liquidity conditions and savings keep the global risk-free interest rate low, boosting investor willingness to buy into risky assets such as commodities, both on a speculative basis and over the long term. Low interest rates also encourage industry consolidation, which boosts pricing power. Furthermore, robust investment trends in emerging economies are commodity-intensive, and a huge tailwind for commodities. Finally, supply bottlenecks remain stubborn and exploration costs continue to mushroom
HEARD ON THE STREET
Bet for Uneven Seas: Try Oil
By ANN DAVIS / WSJ
August 20, 2007
Investors have been fleeing risky investments, but that doesn't mean oil futures will tank along with other ailing assets.
Analysts and traders cite a host of reasons why -- despite a rocky August so far -- crude-oil prices could stay relatively high even as the credit and stock markets swoon. Though market turmoil may accentuate a seasonal drop in crude prices this fall, other forces could pull oil back up in the short term or by year's end, they say.
For one, some play down the 8% drop in light, sweet crude on the New York Mercantile Exchange this month from its record close July 31 of $78.21. Oil closed at $71.98 a barrel Friday. Lehman Brothers Holdings Inc. energy analyst Adam Robinson attributed the downdraft to hedge funds and other investors' attempts to raise cash from well-performing investments as they managed problems in other parts of their portfolios.
"I don't think it is a coincidence that on July 31, we peaked," Mr. Robinson contends. That is the day many hedge funds recorded monthly returns. In recent weeks, including late last week, "people took losses on fixed-income and equities but liquidated oil investments" either to lock in profits or raise cash.
Many fossil fuels, including oil and gasoline, remain up by double-digit percentages this year. Some industrial materials, such as aluminum and nickel, have lost ground in recent months, but remain at historically high levels.
Of course, contagion could still spread to the oil and other commodity markets if the U.S. economy stumbles. A recession, especially if it spread globally, would severely cut industrial- and consumer-energy consumption. Last week, the Organization of Petroleum Exporting Countries said uncertainties in world economic growth were clouding the outlook for oil demand.
Still, crude-oil supplies may stay tight and prices may be less vulnerable than other markets.
If the Federal Reserve cuts interest rates in coming months, which many investors think likely even after other steps it took Friday, this could push down the U.S. dollar relative to other currencies as global investors move some money invested in U.S. debt abroad. Commodities are mostly dollar-denominated. The lower the value of the dollar, the more greenbacks it takes to buy a barrel of oil. Many economists predict further dollar weakening whether or not the Fed cuts rates.
OPEC, which pumps about 40% of the world's crude, is set to meet Sept. 11 in Vienna. Although the International Energy Agency, which tracks energy markets for industrialized nations, has warned of continued market tightness, predictions are streaming in that OPEC won't boost production.
OPEC has said U.S. oil inventories are ample. It may be reluctant to agree to a production increase if it mainly satisfies U.S. refiners' desire for cheap crude to cut their processing costs. Deutsche Bank AG analysts said they expect "OPEC will only start to struggle to defend the oil price if world growth falls below 3%. We are currently forecasting world growth of 4.6% next year."
Another catch: Even if OPEC does increase supply, it could take a couple months for tankers with the added barrels to reach the U.S., adds Lehman's Mr. Robinson.
Then there is the annual ritual known as hurricane season, which runs through November. A big storm could damage oil-production operations in the Gulf of Mexico or the Louisiana ports that receive foreign oil imports. Late last week, worries that Hurricane Dean would strengthen over the weekend and threaten the Gulf Coast prompted some drillers and energy companies to evacuate potentially threatened offshore platforms as a precaution. It takes days to close down platforms safely and additional time to restart the facilities.
As for finding new oil to relieve a tight market, Western energy companies may pull back on exploration amid the current credit crunch. If this weren't enough, structural changes in the oil-futures markets over the past few weeks lowered incentives to keep oil in storage.
Traders are abuzz about how the need for crude on the spot market has pushed up today's going rate relative to the price of oil to be delivered a few months from now, a state known as "backwardation." Energy economist Philip Verleger said in a recent report that holders of physical oil may be quicker to sell it off and to expect "a new equilibrium with lower stocks...and probably higher prices," at least as long as a recession doesn't loom.
The switch to backwardation, a condition the market hasn't seen in more than two years, also has "elevated" already strong institutional-investor interest in oil investments, providing some upward pressure to the price, says John Brynjolfsson, portfolio manager of the Pimco Commodity Real Return Strategy Fund, overseen by the Allianz AG unit, Pacific Investment Management Co. The reason? Investors holding oil futures make a little extra money each month when they sell an expiring contract and replace it with one for farther-out delivery that is a little cheaper.
Still, betting on oil's rise isn't for the faint of heart. Lehman points out that every year since 1999, oil prices have fallen at least 15% in the fourth quarter from August or September peaks, before a pickup tied to winter energy consumption kicks in.
By David Gaffen
WSJ / 23rd August 2007
Stocks aren’t doing much, bonds are quiet, energy markets are calm and even asset-backed commercial paper rates are reportedly starting to relax a bit. Which by default makes the most exciting market of the day…wheat. Yes, really.
Wheat futures traded on the CME were up sharply today after Statistics Canada reported a 19.6% year-over-year decline for the expected wheat harvest over the next month, thanks to a heat wave producing a drought.
“People are searching for grain and we’re up into uncharted territory,” notes Darin Newsom, senior commodities analyst at DTN in Omaha. The December wheat contract rose 6.25 cents to $7.38 a bushel, after earlier touching $7.54 a bushel.
Wheat: commodity of champions. Futures in this grain have spiked dramatically since the middle of May, partially because of reduced supply thanks to poor weather conditions in Europe and Australia, causing world production forecasts to be trimmed. In addition, this market has been afflicted with similar speculation as other normally staid commodities markets. “There’s been a huge flow of money into these markets,” Mr. Newsom said.
Wheat was trading around $5 a bushel in mid-May on the CME, but has spiked by nearly 50% since. Export demand has been steady, and supply concerns aren’t likely to fade .
“If you look at it rationally, we’re well above normal trading levels,” says Benson Quinn Commodities analyst Ryan Kelbrants. “But funds are long; managed money is long a lot of these contracts, and as long as they keep on lowering the world numbers and exports stay positive, we could see support in these markets.”
Several factors contribute to higher farm commodities prices
Two necessities, fuel and food, create spiral of rising prices
By Victor Davis Hanson
San Jose Mercury News / US
While we worry about gas prices, the costs of milk, meat and fresh produce silently soar. So like the end of cheap energy, is the era of cheap food also finally over?
Since the farm depression of the early 1980s - remember the first Farm Aid concert in 1985 - farmers have gone broke in droves from cheap commodity prices. The public shrugged, happy enough to get inexpensive food. Globalization saw increased world acreage planted and farmed under Western methods of efficient production. And that brought into the United States even more plentiful imported food.
Continued leaps in agricultural technology ensured more production per acre. The result was likewise predictable: the same old food surpluses and low prices. My late parents, who owned the farm I now live on in central California, used to sigh that the planet was reaching 6 billion mouths and so things someday "would have to turn around for farmers."
Now they apparently have. Food prices are climbing at rates approaching 10 percent per year. But why the sudden change?
There have been a number of relatively recent radical changes in the United States and the world that, taken together, provide the answer:
Modern high-tech farming is energy-intensive. So recent huge price increases in diesel fuel and petroleum-based fertilizers and chemicals have been passed on to the consumer.
The public furor over illegal immigration has, despite all the government inaction, still translated into some increased border security. And with more vigilance, fewer illegal aliens are crossing the border to work in labor-intensive crops like fresh fruits and vegetables.
The U.S. population still increases while suburbanization continues. The sprawl of housing tracts, edge cities and shopping centers insidiously gobbles up prime farmland at the rate of hundreds of thousands of acres per year.
In turn, periodic droughts and competition from growing suburbs in the West have made water for farming scarcer, more expensive - and sometimes unavailable.
On the world scene, 2 billion Indians and Chinese are enjoying the greatest material improvement in their nations' histories - and their improved diets mean more food consumed than ever before.
The result is that global food supplies are also tightening up, both at home and abroad. America has become a net food importer. We seem to have developed a new refined taste for foreign wines, cheeses and fresh winter fruits even as we are consuming more of our corn, wheat, soybeans and dairy products at home.
Now comes the biofuels movement. For a variety of reasons, ranging from an attempt to become less dependent on foreign oil to a desire for cleaner fuels, millions of acres of farmland are being redirected to corn-based ethanol.
If hundreds of planned new ethanol refineries are built, the United States could very shortly be producing about 30 billion gallons of corn-based fuel per year, using one of every four acres planted to corn for fuel. This dilemma of food or fuel is also appearing elsewhere in the world as Europeans and South Americans begin redirecting food acreages to corn-, soy-, or sugar- based biofuels.
Corn prices in America have spiked. And since corn is also a prime ingredient for animal feeds and sweeteners, prices likewise are rising for poultry, beef and everything from soft drinks to candy.
There is more corn acreage - about 90 million acres are predicted this year - than at any time in the nation's last half-century. But today's total farm acreage is either static or shrinking; land for biofuels is usually taken from wheat, soybeans or cotton, ensuring those supplies grow tight as well.
In the past, the genius of our farmers and the mind-boggling innovation of American agribusiness meant that farm production periodically doubled. Indeed, today we are producing far more food on far fewer acres than ever before.
But we are nearing the limits of further efficiency - especially when such past amazing leaps in production relied on once-cheap petrochemicals, fuels and fertilizers.
As in the case of oil, we've gone through these sudden farm price spikes before. My grandfather once told me that in some 70 years of boom-and-bust farming he only made money during World Wars I and II, and the late 1960s.
But this latest round of high food prices seems coupled to energy shortages, and so won't go away anytime soon. That raises questions critical to the very security of this nation, which may have to import as many agricultural commodities as it does energy - and find a way to pay for both.
The American consumer lifestyle took off thanks to low-cost fuel and food. Once families could drive and eat cheaply, they had plenty of disposable income for housing and consumer goods.
But if they can't do either anymore, how angry will they get as they buy less and pay more for the very staples of life?
San Francisco Fund Manager Extols Virtues of Precious and Base Metals
By Al Korelin
Aug 29 2007 4:30PM
Marshall G. Berol, co - Portfolio Manager of the Encompass Fund (www.encompassfund.com), has invested about 35% of the Fund’s assets in precious and base metal companies over the past fourteen months. So far it has been a win for investors.
Berol has been following resource companies for the past twenty-five years, and believes that in today’s environment these companies provide not only effective insurance, but great upside potential for the Fund’s investors.
I recently spent a couple of days with him in Saskatoon and Uranium City, Canada, looking at mining properties. The airplane and helicopter flights we took together gave me the opportunity to pick his brain.
We discussed how last week on The Korelin Economics Report the guests were split 50-50 between optimism and pessimism about commodity prices, and commodity equities.
Regarding base metals, Lawrence Raulston and others feels that an unprecedented buying opportunity exists today. On the opposite side, Paul van Eden, Bob Moriarity and others expressed the opinion that copper, nickel and other commodities were something to avoid right now.
Berol is in the camp with our guests who are optimistic about prices. Berol and his co-Portfolio Manager, Malcolm H. Gissen, believe that the supply-demand picture favors the continued rise in the price of the base and industrial metals (copper, zinc, nickel, molybdenum and uranium) for some time to come. While recognizing that there will be price volatility, the demand for these metals continues to grow with the growth of the economies of China, India, the rest of Asia, and South America. Particularly in China and India, the need for the continued building of the infrastructure requires various of these metals, such as copper for wiring, nickel and zinc for steel manufacturing, molybdenum for pipelines, and uranium for the fuel for the 440 nuclear plants currently operating, and the approximately 100 new nuclear plants now under construction or planned, around the world. The growing consumer class in these countries also want housing, refrigerators, automobiles, cell phones, etc.
The demand continues to grow, and it is increasingly difficult, time-consuming and expensive to bring new mines into production, or even increase the output of existing mines. This is due to increased environmental requirements, the need to accommodate the local people, and the fact that the “easy” material has been found. New discoveries and mines are in increasingly difficult geographic locations or less stable geopolitical areas.
I completely agree with Berol. I went on record some time back stating on the air that I was a long-term bull in both the base and precious metals sectors. Everything I learned as both an undergraduate and graduate student indicates that for a while it simply makes sense.
Berol also believes that it makes as much sense in the gold and silver areas, to which I agree. While some of the underlying factors involving gold are different, there is still a supply-demand imbalance that is not likely to correct for years. Gold isn’t so dependent on the infrastructure build-out as the base and industrial metals, but it does have the additional historic demand factors of “storehouse of value” in difficult times, and demand from an expanding middle class for jewelry and gift giving. Silver has increasing industrial uses, as well as consumer demand. Recall that only a few years ago, the silver bears were saying silver “was dead” because of it’s decreasing usage in photography. The fact is that silver has gone from $3.00 - $4.00 per ounce to over $11.00 (with a high around $15.00) in that time frame.
The investment climate today is anything but stable and the gyrations in the conventional markets, as measured by the Dow, the Nasdaq Composite and the S&P are truly frightening. You cannot open a newspaper today without reading about serious liquidity concerns around the world. It’s enough to scare anybody.
I truly believe that fear is the incorrect emotion here. Rather than be fearful investors need to be optimistic. Why? Simply put, we have an unprecedented opportunity for profits from investing in precious and base metals and the related public companies. Listen to The Korelin Economics Report (www.kereport.com) and hear discussion with experts in this field and see if you don’t agree.