By wendy.chothia
Created 27/04/2011 - 16:58
Alternative Asset Analysis (AAA), an alternative investment advocacy organisation, reports that global demand for timber has increased, resulting in higher prices across Europe, Japan, China and the United States.
AAA collated industry lumber data from a number of sources and cross-referenced it against reports from the North American Wood Fiber Review and from Wood Resource Quarterly.
Log buyers in Japan, South Korea and China are driving up demand for timber from the US and, as a result, prices have risen significantly, according to the new North American Wood Fiber Review.
Worldwide demand for softwood lumber rose 18 per cent in 2010, continuing a trend that had already been occurring in China and Japan since early 2009. Global wood consumption for the first quarter of 2011 is up around 20 per cent on last year.
"The official results of the wood fiber review show all regions of North America saw prices trending upwards over the past two years, with growth particularly notable in the north west regions," says Anthony Johnson, an analyst, fund manager and partner at AAA.
These positive comments follow news that log exports to Asia from the west coast of the US have reached their highest point for 14 years. Other regions have also seen price increases and export growth, but not to the same extent as the north west corner and coastal regions, where prices have really soared.
The news is great for the US forestry industry, which has been through a tough time of late with the domestic housing market slump. China, on the other hand has an insatiable need for raw materials to use in its massive growth and development projects. It is turning to the US for its timber following the introduction of new taxes in Russia where it had previously sourced its timber.
The rise in prices was perhaps most notable on Douglas fir logs in the fourth quarter of 2010, with prices rising by 19 per cent from a year before. In addition, hemlock sawlog prices were up by an impressive 25 per cent on the year before. The prices of southern yellow pine lumber in the US were up 24 per cent in March 2011 over same period last year. Prices were also up substantially for Spruce Pine Fur lumber in Canada.
AAA was also keen to welcome the news that the price rises were also being seen in Canada, and, much like the US, the western provinces saw prices rise much more sharply than the rest of the country.
"News that demand for timber is spreading from Asia to the US and Canada is extremely positive for alternative asset investors who were looking to make some health returns while diversifying their portfolio. This proves why alternative assets are such a good addition to any investment portfolio: while equities remain uncertain, timber prices are soaring," says Johnson.
Timber prices are forecast to continue to rise throughout the rest of 2011 in line with continued demand from China and expected demand from Japan following the devastating earthquake.
AAA is keen to promote investment in emerging markets like Brazil, where firms like Greenwood Management are offering investments in plantations of sustainable non-native species for export and charcoal production.
NEWS - Commodites, Agriculture, Green Investment - NEWS
4/20/2011
Cargill unit Black River plans $400 mln Asian food fund
Reuters | 18 April 2011
Deda Chicken Processing Plant, Dehui City, Julin Province, 2005 (Photo: Edward Burtynsky)
By Kevin Lim
Black River, the private equity arm of U.S. agribusiness and trading giant Cargill , is raising a $400 million fund to invest in firms that will benefit from rising Asian demand for meat and vegetables.
The proposed Black River Capital Partners (Food) Fund, which has already received about $200 million in commitments, expects to invest about half the money in China, where people are eating more protein and fruits and less cereal and tubers.
"GDP growth is driving food consumption in emerging markets (and) the demand for safe and high quality food, against a backdrop of outdated production methods and fragmented industry means high margin revenue opportunity for leading players," Black River said in presentation notes seen by Reuters.
"Recent surveys indicate more than 96 percent of (Chinese) consumers are very concerned about food safety and 75 percent of interviewees expressed a willingness to pay extra for safer food," it added.
Black River's Singapore office could not be reached for comment.
The price of grains and other agricultural commodities have risen in recent months, pushing up inflation in many developing countries and raising concerns about possible food shortages.
Last week, the World Bank warned higher global food and energy prices are affecting a larger swathe of developing countries than at the beginning of the year, threatening to push more people into poverty. [ID:nWALEFE768]
According to the presentation, Black River is targeting 30 percent gross cumulative return per annum for the planned food fund, which has a life of 10 years. It will charge a 17.5 percent performance fee if it achieves a hurdle rate of 8 percent.
Black River's investment pipeline includes a Chinese pork producer and distributor, a duck farming firm in northern China, a fish producer in Costa Rica and a frozen fish processor in Singapore.
Institutions that have committed money to the food fund include Dutch pension fund PGGM and Utimco, which manages money for the University of Texas and Texas A&M University, according to the presentation Black River is now targeting investors in Singapore and Hong Kong.
(Editing by Muralikumar Anantharaman)
Deda Chicken Processing Plant, Dehui City, Julin Province, 2005 (Photo: Edward Burtynsky)
By Kevin Lim
Black River, the private equity arm of U.S. agribusiness and trading giant Cargill , is raising a $400 million fund to invest in firms that will benefit from rising Asian demand for meat and vegetables.
The proposed Black River Capital Partners (Food) Fund, which has already received about $200 million in commitments, expects to invest about half the money in China, where people are eating more protein and fruits and less cereal and tubers.
"GDP growth is driving food consumption in emerging markets (and) the demand for safe and high quality food, against a backdrop of outdated production methods and fragmented industry means high margin revenue opportunity for leading players," Black River said in presentation notes seen by Reuters.
"Recent surveys indicate more than 96 percent of (Chinese) consumers are very concerned about food safety and 75 percent of interviewees expressed a willingness to pay extra for safer food," it added.
Black River's Singapore office could not be reached for comment.
The price of grains and other agricultural commodities have risen in recent months, pushing up inflation in many developing countries and raising concerns about possible food shortages.
Last week, the World Bank warned higher global food and energy prices are affecting a larger swathe of developing countries than at the beginning of the year, threatening to push more people into poverty. [ID:nWALEFE768]
According to the presentation, Black River is targeting 30 percent gross cumulative return per annum for the planned food fund, which has a life of 10 years. It will charge a 17.5 percent performance fee if it achieves a hurdle rate of 8 percent.
Black River's investment pipeline includes a Chinese pork producer and distributor, a duck farming firm in northern China, a fish producer in Costa Rica and a frozen fish processor in Singapore.
Institutions that have committed money to the food fund include Dutch pension fund PGGM and Utimco, which manages money for the University of Texas and Texas A&M University, according to the presentation Black River is now targeting investors in Singapore and Hong Kong.
(Editing by Muralikumar Anantharaman)
4/07/2011
Investors pump $400m into Ukraine farming groups
Agrimoney | 1 April 2011
Investors have backed hopes for Ukraine agriculture with a near-$400m cash injection, pouring $140m into an acquisition warchest raised by Kernel Holding, and $250m to support expansion plans at farm operator Mriya Agro.
Kernel, the silos-to-sunflowers group which yesterday announced the issue of about 5m new shares to bankroll ambitious takeover plans, said that it had in fact sold 5.4m shares, raising 399.4m zloty ($140m).
The placement price of 74 zloty per share represented a 1 zloty discount to Wednesday's closing price.
However, it was significantly above levels as low as 68 zloty to which the shares fell after the stock issue was announced.
The shares, which are traded in Warsaw, rebounded 5.3% to 74.75 zloty in morning trade on Friday.
'Aggressive expansion'
The announcement came as Mriya Agro, an unlisted group which farms more than 200,000 hectares in Ukraine, revealed the closure of its first issue of eurobonds, for $250m, which has been in train since last year.
Mykola Huta, the Mriya chief executive, said that the cash "opens new opportunities" for the grains-to- sugar beet grower, enabling it "to expand operating activity, optimise financial costs and strengthen our competitive advantages".
Fitch Rating analysts two weeks ago said that the cash would "fund aggressive expansion... across the value chain in the promising Ukrainian agricultural sector".
Fitch analyst Pablo Mazzini said: "The outlook for Ukrainian agriculture is positive, given the low base of comparative production yields and high prevailing commodity prices.
"This means private companies such as Mriya are favourably placed to take advantage of the environment."
'International reputation'
The bond issue, which was last week raised from $200m, was more than twice covered, and purchased in the main by European investors, Mriya said.
US buyers picked up some $55m of the five-year bonds, which carry a fix coupon of 10.95%, with about $25m going to Asian investors.
"We think our first issue of eurobonds was successful," Mr Huta said.
"High interest for our eurobonds... improves our reputation in international capital markets".
Investors have backed hopes for Ukraine agriculture with a near-$400m cash injection, pouring $140m into an acquisition warchest raised by Kernel Holding, and $250m to support expansion plans at farm operator Mriya Agro.
Kernel, the silos-to-sunflowers group which yesterday announced the issue of about 5m new shares to bankroll ambitious takeover plans, said that it had in fact sold 5.4m shares, raising 399.4m zloty ($140m).
The placement price of 74 zloty per share represented a 1 zloty discount to Wednesday's closing price.
However, it was significantly above levels as low as 68 zloty to which the shares fell after the stock issue was announced.
The shares, which are traded in Warsaw, rebounded 5.3% to 74.75 zloty in morning trade on Friday.
'Aggressive expansion'
The announcement came as Mriya Agro, an unlisted group which farms more than 200,000 hectares in Ukraine, revealed the closure of its first issue of eurobonds, for $250m, which has been in train since last year.
Mykola Huta, the Mriya chief executive, said that the cash "opens new opportunities" for the grains-to- sugar beet grower, enabling it "to expand operating activity, optimise financial costs and strengthen our competitive advantages".
Fitch Rating analysts two weeks ago said that the cash would "fund aggressive expansion... across the value chain in the promising Ukrainian agricultural sector".
Fitch analyst Pablo Mazzini said: "The outlook for Ukrainian agriculture is positive, given the low base of comparative production yields and high prevailing commodity prices.
"This means private companies such as Mriya are favourably placed to take advantage of the environment."
'International reputation'
The bond issue, which was last week raised from $200m, was more than twice covered, and purchased in the main by European investors, Mriya said.
US buyers picked up some $55m of the five-year bonds, which carry a fix coupon of 10.95%, with about $25m going to Asian investors.
"We think our first issue of eurobonds was successful," Mr Huta said.
"High interest for our eurobonds... improves our reputation in international capital markets".
Upside for agribusiness investment is promising
Moscow Times | 6 April 2011
By Charles Bausman
This comes as no surprise. With the ongoing rise in food prices, increasing demand for agriculture from the world’s largest investors, the barriers to investments appearing in Brazil, and the growing delta between Russian and world agri asset values, it was only a matter of time.
The opportunities appear startling. Extremely fertile black earth farmland sells for about $500 per hectare, which is about 15 percent of what similar yielding land fetches in comparable markets. Efficient farmers can generate earnings of $400 to $500 per hectare, making the profit opportunity more than obvious. An oil-rich government bent on building up the sector dispenses subsidized loans, significantly amplifying already high equity returns, and is investing heavily in infrastructure, which in many respects is superior to South America. North Africa, within easy reach of Russian ports, is one of the largest and fastest-growing grain and oilseeds markets.
Investment is not limited to grains. A government incentive program to achieve 85 percent self-sufficiency in meat and poultry by 2015 is driving rapid construction of enormous pork and poultry “factories,” often with thin environmental regulation. Supersized dairy operations are also being rolled out.
Russia defies prediction, and it remains to be seen whether foreign operators will participate in what appears to be an unfolding bonanza. The sector is undercapitalized, which explains the outsized returns and low asset values. Capital needs far outstrip the significant amounts the government is pouring in. The government is on a drive to increase investment into the economy as a whole, agribusiness included. Put all this together and it would appear that substantial foreign investment in Russian agriculture over the coming years is likely.
The scene is reminiscent of Russian energy assets in the early and mid-2000s. They also traded 10 times below world comparables, and investors fretted about ownership rights and country risk, but were driven on by the relentless rise in energy prices. We know how that one ended. There were some spectacular blow-ups, but by and large, those who correctly analyzed the risk and got in ahead of the crowd were well rewarded.
Charles Bausman is director at Global AgInvesting, an advisory firm for institutional investment in agriculture.
By Charles Bausman
This comes as no surprise. With the ongoing rise in food prices, increasing demand for agriculture from the world’s largest investors, the barriers to investments appearing in Brazil, and the growing delta between Russian and world agri asset values, it was only a matter of time.
The opportunities appear startling. Extremely fertile black earth farmland sells for about $500 per hectare, which is about 15 percent of what similar yielding land fetches in comparable markets. Efficient farmers can generate earnings of $400 to $500 per hectare, making the profit opportunity more than obvious. An oil-rich government bent on building up the sector dispenses subsidized loans, significantly amplifying already high equity returns, and is investing heavily in infrastructure, which in many respects is superior to South America. North Africa, within easy reach of Russian ports, is one of the largest and fastest-growing grain and oilseeds markets.
Investment is not limited to grains. A government incentive program to achieve 85 percent self-sufficiency in meat and poultry by 2015 is driving rapid construction of enormous pork and poultry “factories,” often with thin environmental regulation. Supersized dairy operations are also being rolled out.
Russia defies prediction, and it remains to be seen whether foreign operators will participate in what appears to be an unfolding bonanza. The sector is undercapitalized, which explains the outsized returns and low asset values. Capital needs far outstrip the significant amounts the government is pouring in. The government is on a drive to increase investment into the economy as a whole, agribusiness included. Put all this together and it would appear that substantial foreign investment in Russian agriculture over the coming years is likely.
The scene is reminiscent of Russian energy assets in the early and mid-2000s. They also traded 10 times below world comparables, and investors fretted about ownership rights and country risk, but were driven on by the relentless rise in energy prices. We know how that one ended. There were some spectacular blow-ups, but by and large, those who correctly analyzed the risk and got in ahead of the crowd were well rewarded.
Charles Bausman is director at Global AgInvesting, an advisory firm for institutional investment in agriculture.
4/04/2011
Food Commodities Rise Seen Swamping Consumers With Inflation
By Nicholas Larkin - Mar 31, 2011 Coffee, sugar and cocoa prices will rise five- to 10-fold by 2014 because of shortages that will mean consumers getting “swamped” by food-price inflation, according to Superfund Financial.
A lack of farmland and rising costs means growers will fail to keep up with demand, said Aaron Smith, managing director of Superfund Financial (Hong Kong) Ltd. and Superfund USA Inc. Commodities account for about 40 percent of Superfund’s $1.25 billion assets under management. Smith correctly predicted record copper prices in November and a month later rightly anticipated that silver would outperform gold.
A United Nations index of world food prices jumped to a record last month, contributing to riots across northern Africa and the Middle East that already toppled leaders in Egypt and Tunisia. Global food security is threatened by “excessive price volatility and speculation,” farm ministers from 48 countries said in a joint statement after meeting in Berlin in January.
“There’s a tremendous shortage of food, there’s a tremendous shortage of arable land,” Smith said in interview in London. “Any kind of food products are going to increase.”
Coffee jumped more than fivefold in the two years through July 1994 and more than tripled from February 2002 to March 2005. Sugar prices rose fourfold from June 2002 to February 2006 and more than tripled from June 2007 to February last year. Cocoa advanced 242 percent from December 2000 to January 2003.
Price Gains
Arabica coffee traded on ICE Futures U.S. in New York almost doubled in the past year and traded at $2.663 a pound at 7:33 a.m. local time. Raw-sugar futures advanced 51 percent to 27.03 cents a pound, while cocoa is little changed at $2,960 a metric ton.
Coffee prices jumped after wet weather damaged crops in Colombia and on forecasts for a smaller harvest in Brazil, the world’s largest exporter. Sugar gained after floods in Pakistan and Australia and cocoa advanced as fighting after elections in November disrupted exports from Ivory Coast, the largest grower.
Superfund, founded in Vienna in 1995, specializes in so- called managed futures, using its own trading system to buy and sell commodities and currency futures, stocks and bonds. It has a 24-hour trading operation in Chicago, Smith said.
The U.S. consumer price index rose 0.5 percent in February, the most since June 2009. Asian countries from China to Indonesia raised interest rates this year to curb inflation. European inflation quickened to 2.6 percent in March, the fastest since October 2008 and above the European Central Bank’s 2 percent limit.
Bull Market
The commodity bull market may last for 15 to 20 years, Smith said in July 2008. The Standard & Poor’s GSCI Index of 24 commodities, which that month dropped as much as 66 percent through February 2009, is still 20 percent below its 2008 peak.
Wheat traded in Chicago is down 8.7 percent this year and sugar has dropped 16 percent. Global sugar production may exceed demand for the first time in four years if “normal weather conditions” return to the biggest growing nations, broker and researcher Jonathan Kingsman said last month.
Access to water, higher labor costs and rising incomes are also issues for food commodities, Smith said.
“There’s about 7 billion people in the world,” he said. “When you have that many people, it only takes tens of millions of people to move up a market that’s so small like sugar.”
Rising Population
World food production will have to increase by 70 percent by 2050 to meet increasing demand from an expanding global population, projected to rise to 9.1 billion by 2050 from 6.9 billion now, Hiroyuki Konuma, the UN Food and Agriculture Organization’s regional representative in Asia, said in an interview in Bangkok on March 9.
Food costs are at “dangerous levels” after pushing 44 million people into poverty since June, World Bank President Robert Zoellick said last month. That adds to the more than 900 million people around the world who go hungry each day, he said.
It’s “an incredibly difficult humanitarian story because the poorest countries will be hit the hardest,” Smith said. “The average person is going to be swamped by food inflation. The new arms race is food and energy.”
An indirect way of betting on food prices is to buy gold, because it tends to do well when inflation accelerates, he said. Gold has gained the past 10 years and reached a record $1,447.82 an ounce last week, while silver is up 22 percent this year at $37.775 an ounce. Gold will climb to $2,000 and silver to $60 in three years, he said.
“I think that gold, and to a lesser extent silver, will dramatically underperform soft commodities, but will at least have a high correlation to them,” Smith said. “When we see short-term rates in the U.S. at double digits then you can start to speculate that gold might be getting close to the end of its run.”
A lack of farmland and rising costs means growers will fail to keep up with demand, said Aaron Smith, managing director of Superfund Financial (Hong Kong) Ltd. and Superfund USA Inc. Commodities account for about 40 percent of Superfund’s $1.25 billion assets under management. Smith correctly predicted record copper prices in November and a month later rightly anticipated that silver would outperform gold.
A United Nations index of world food prices jumped to a record last month, contributing to riots across northern Africa and the Middle East that already toppled leaders in Egypt and Tunisia. Global food security is threatened by “excessive price volatility and speculation,” farm ministers from 48 countries said in a joint statement after meeting in Berlin in January.
“There’s a tremendous shortage of food, there’s a tremendous shortage of arable land,” Smith said in interview in London. “Any kind of food products are going to increase.”
Coffee jumped more than fivefold in the two years through July 1994 and more than tripled from February 2002 to March 2005. Sugar prices rose fourfold from June 2002 to February 2006 and more than tripled from June 2007 to February last year. Cocoa advanced 242 percent from December 2000 to January 2003.
Price Gains
Arabica coffee traded on ICE Futures U.S. in New York almost doubled in the past year and traded at $2.663 a pound at 7:33 a.m. local time. Raw-sugar futures advanced 51 percent to 27.03 cents a pound, while cocoa is little changed at $2,960 a metric ton.
Coffee prices jumped after wet weather damaged crops in Colombia and on forecasts for a smaller harvest in Brazil, the world’s largest exporter. Sugar gained after floods in Pakistan and Australia and cocoa advanced as fighting after elections in November disrupted exports from Ivory Coast, the largest grower.
Superfund, founded in Vienna in 1995, specializes in so- called managed futures, using its own trading system to buy and sell commodities and currency futures, stocks and bonds. It has a 24-hour trading operation in Chicago, Smith said.
The U.S. consumer price index rose 0.5 percent in February, the most since June 2009. Asian countries from China to Indonesia raised interest rates this year to curb inflation. European inflation quickened to 2.6 percent in March, the fastest since October 2008 and above the European Central Bank’s 2 percent limit.
Bull Market
The commodity bull market may last for 15 to 20 years, Smith said in July 2008. The Standard & Poor’s GSCI Index of 24 commodities, which that month dropped as much as 66 percent through February 2009, is still 20 percent below its 2008 peak.
Wheat traded in Chicago is down 8.7 percent this year and sugar has dropped 16 percent. Global sugar production may exceed demand for the first time in four years if “normal weather conditions” return to the biggest growing nations, broker and researcher Jonathan Kingsman said last month.
Access to water, higher labor costs and rising incomes are also issues for food commodities, Smith said.
“There’s about 7 billion people in the world,” he said. “When you have that many people, it only takes tens of millions of people to move up a market that’s so small like sugar.”
Rising Population
World food production will have to increase by 70 percent by 2050 to meet increasing demand from an expanding global population, projected to rise to 9.1 billion by 2050 from 6.9 billion now, Hiroyuki Konuma, the UN Food and Agriculture Organization’s regional representative in Asia, said in an interview in Bangkok on March 9.
Food costs are at “dangerous levels” after pushing 44 million people into poverty since June, World Bank President Robert Zoellick said last month. That adds to the more than 900 million people around the world who go hungry each day, he said.
It’s “an incredibly difficult humanitarian story because the poorest countries will be hit the hardest,” Smith said. “The average person is going to be swamped by food inflation. The new arms race is food and energy.”
An indirect way of betting on food prices is to buy gold, because it tends to do well when inflation accelerates, he said. Gold has gained the past 10 years and reached a record $1,447.82 an ounce last week, while silver is up 22 percent this year at $37.775 an ounce. Gold will climb to $2,000 and silver to $60 in three years, he said.
“I think that gold, and to a lesser extent silver, will dramatically underperform soft commodities, but will at least have a high correlation to them,” Smith said. “When we see short-term rates in the U.S. at double digits then you can start to speculate that gold might be getting close to the end of its run.”
Commodities Investors to Keep Powder Dry on Allocations
By Reuters
NEW YORK (Reuters)—Commodity traders waiting for a fresh onset of institutional investment with the dawning of the second quarter may be in for disappointment.
Two years of steady allocations into raw material, energy and agricultural markets may stall for the time being, with several weeks of moribund activity extended by deep uncertainties in the Middle East, Japan and euro zone. As if that weren't enough, investors must now squarely confront the ending of the super-easy monetary policy cycle and the tricky act of raising rates without upending an economic recovery that remains fragile at best.
Investors reckon this spells "hold" for commodities, many of which have lost momentum during a first quarter in which many new post-2008 highs were swiftly followed by deep correction.
In the last two weeks, daily volume in energy, metals and grains was off 30 percent or more versus the 30-day average, underscoring traders' indecision. That, some say, could affect the momentum of the long money that had been flowing into commodities — meaning the record high sums tracked since December by the U.S. Commodity Futures Trading Commission may slow from March.
"You can bet most commodity-related investors were fairly near full-invested approaching the quarter-end," said Oliver Pursche, president at Gary Goldberg Financial Services, a firm in Suffern, N.Y., which manages $500 million of assets, including a commodities mutual fund. "Now, everything is pointing to stay the course, don't do anything and if you get new capital coming in, don't rush to commit it."
Net investment into U.S. commodity indices peaked for a third month in a row in February, with long positions that bet on price gains crossing $300 billion the first time, government data showed this week.
The value of holdings by institutional investors and others who buy into baskets of commodity futures that represent such indices surged more than $45 billion over those three months. Rising prices was one reason: U.S. crude oil rose 16.8 percent on the quarter, and the Reuters-Jefferies CRB commodities index 8 percent for a third straight quarterly gain.
Fed Policy
Liquidity in commodities could also dry up quickly if the U.S. Federal Reserve embarks on monetary tightening for any reason, despite all promises in the past that it wouldn't.
Since the financial crisis, the U.S. central bank has approved one stimulus package after another to boost the economy and the latest — a $600 billion bond purchase program known in market lingo as Quantitative Easing II, or QE II — will end in June. While there is no word yet of a QE III, some senior Fed officials have been calling for the current package itself to be cut by $100 billion.
Others have suggested an outright rate hike soon, like Minneapolis Fed President Narayana Kocherlakota, who said rates could rise by three-quarters of a percentage point by the end of 2011 — faster than markets expect.
"Stimulus money has been one of the biggest drivers of commodities and any attempt to choke this lifeblood is likely to be greeted by investor panic," said the managing partner of a New York hedge fund that manages $70 million in commodities.
Trading volumes in oil shrunk after investors began to worry about how long the market will be able to capitalize just on the freeze in Libyan oil exports and unrest in other oil-producing Arab countries. Crude futures in New York defied high U.S. oil stockpiles to rise $15 during the quarter to a 2-1/2 year high above $106 per barrel.
Traders say prices could dive if Libyan rebels locked in fierce fighting with Muammar Gaddafi's troops succeed in taking key oil-producing towns to resume exports. Even so, no one really wants to bet on the direction in oil now.
"Generally speaking, our stance on the energy sector and oil in particular is going short right now doesn't make sense and adding to the long position doesn't make a lot of sense either," Mr. Pursche said. "So, it's a hold, and that obviously impacts trading volumes."
Don Steinbrugge, managing partner of Agecroft Partners in Richmond, Va., concurs with that.
"The average institutional investor thinks there's more downside than upside in the oil market if this whole situation in Libya is resolved in the next couple of weeks," said Mr. Steinbrugge, a hedge fund consultant who also gives advice on portfolio building to big investors like pensions. "That said, I think it's a lot easier to predict long-term trends in commodity prices based on projections of global GDP, and what demand will be for various components of the market, than to forecast supply shocks."
Japan Woes
Copper prices have fallen almost 10 percent since hitting record highs of nearly $10,200 a ton in mid-February. Trading volumes in copper — a key economic bellwether — have dwindled, too, on fear that the post-earthquake nuclear radiation leaks in Japan and the euro zone's debt woes would get worse before getting better.
Japan remains one of the world's largest economies although it is not as big a commodities consumer as China.
The huge sovereign debt of countries such as Greece and Portugal have dragged on market sentiment for more than a year, taking a fresh blow after credit rating downgrades this week.
Despite the run-up in oil, the average energy hedge fund is down nearly 3 percent year-to-date, according to data tracked by Chicago-based Hedge Fund Research.
Unless the market overcomes its trading inertia, returns could remain dismal, putting pressure on fund managers.
"As investors, we want the best risk-adjusted returns," said Mike Hennessy, managing director at Morgan Creek Capital, a $10 billion fund-of-funds in Chapel Hill, N.C., that invests with managers specializing amongst others in energy and commodity portfolios. "We download all capital to managers and expect them to have a view and navigate those markets on a short-term basis."
NEW YORK (Reuters)—Commodity traders waiting for a fresh onset of institutional investment with the dawning of the second quarter may be in for disappointment.
Two years of steady allocations into raw material, energy and agricultural markets may stall for the time being, with several weeks of moribund activity extended by deep uncertainties in the Middle East, Japan and euro zone. As if that weren't enough, investors must now squarely confront the ending of the super-easy monetary policy cycle and the tricky act of raising rates without upending an economic recovery that remains fragile at best.
Investors reckon this spells "hold" for commodities, many of which have lost momentum during a first quarter in which many new post-2008 highs were swiftly followed by deep correction.
In the last two weeks, daily volume in energy, metals and grains was off 30 percent or more versus the 30-day average, underscoring traders' indecision. That, some say, could affect the momentum of the long money that had been flowing into commodities — meaning the record high sums tracked since December by the U.S. Commodity Futures Trading Commission may slow from March.
"You can bet most commodity-related investors were fairly near full-invested approaching the quarter-end," said Oliver Pursche, president at Gary Goldberg Financial Services, a firm in Suffern, N.Y., which manages $500 million of assets, including a commodities mutual fund. "Now, everything is pointing to stay the course, don't do anything and if you get new capital coming in, don't rush to commit it."
Net investment into U.S. commodity indices peaked for a third month in a row in February, with long positions that bet on price gains crossing $300 billion the first time, government data showed this week.
The value of holdings by institutional investors and others who buy into baskets of commodity futures that represent such indices surged more than $45 billion over those three months. Rising prices was one reason: U.S. crude oil rose 16.8 percent on the quarter, and the Reuters-Jefferies CRB commodities index 8 percent for a third straight quarterly gain.
Fed Policy
Liquidity in commodities could also dry up quickly if the U.S. Federal Reserve embarks on monetary tightening for any reason, despite all promises in the past that it wouldn't.
Since the financial crisis, the U.S. central bank has approved one stimulus package after another to boost the economy and the latest — a $600 billion bond purchase program known in market lingo as Quantitative Easing II, or QE II — will end in June. While there is no word yet of a QE III, some senior Fed officials have been calling for the current package itself to be cut by $100 billion.
Others have suggested an outright rate hike soon, like Minneapolis Fed President Narayana Kocherlakota, who said rates could rise by three-quarters of a percentage point by the end of 2011 — faster than markets expect.
"Stimulus money has been one of the biggest drivers of commodities and any attempt to choke this lifeblood is likely to be greeted by investor panic," said the managing partner of a New York hedge fund that manages $70 million in commodities.
Trading volumes in oil shrunk after investors began to worry about how long the market will be able to capitalize just on the freeze in Libyan oil exports and unrest in other oil-producing Arab countries. Crude futures in New York defied high U.S. oil stockpiles to rise $15 during the quarter to a 2-1/2 year high above $106 per barrel.
Traders say prices could dive if Libyan rebels locked in fierce fighting with Muammar Gaddafi's troops succeed in taking key oil-producing towns to resume exports. Even so, no one really wants to bet on the direction in oil now.
"Generally speaking, our stance on the energy sector and oil in particular is going short right now doesn't make sense and adding to the long position doesn't make a lot of sense either," Mr. Pursche said. "So, it's a hold, and that obviously impacts trading volumes."
Don Steinbrugge, managing partner of Agecroft Partners in Richmond, Va., concurs with that.
"The average institutional investor thinks there's more downside than upside in the oil market if this whole situation in Libya is resolved in the next couple of weeks," said Mr. Steinbrugge, a hedge fund consultant who also gives advice on portfolio building to big investors like pensions. "That said, I think it's a lot easier to predict long-term trends in commodity prices based on projections of global GDP, and what demand will be for various components of the market, than to forecast supply shocks."
Japan Woes
Copper prices have fallen almost 10 percent since hitting record highs of nearly $10,200 a ton in mid-February. Trading volumes in copper — a key economic bellwether — have dwindled, too, on fear that the post-earthquake nuclear radiation leaks in Japan and the euro zone's debt woes would get worse before getting better.
Japan remains one of the world's largest economies although it is not as big a commodities consumer as China.
The huge sovereign debt of countries such as Greece and Portugal have dragged on market sentiment for more than a year, taking a fresh blow after credit rating downgrades this week.
Despite the run-up in oil, the average energy hedge fund is down nearly 3 percent year-to-date, according to data tracked by Chicago-based Hedge Fund Research.
Unless the market overcomes its trading inertia, returns could remain dismal, putting pressure on fund managers.
"As investors, we want the best risk-adjusted returns," said Mike Hennessy, managing director at Morgan Creek Capital, a $10 billion fund-of-funds in Chapel Hill, N.C., that invests with managers specializing amongst others in energy and commodity portfolios. "We download all capital to managers and expect them to have a view and navigate those markets on a short-term basis."
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