(From The Independent (London), provided by LexisNexis)
Publication: The Independent (London)
HAMISH McRAE Business Communicator of the Year
It is that time of year when the professional make their customary predictions about the world economy and markets for the forthcoming year, and a pretty downbeat lot they are.
If one were to try to distil the main economic messages, these would be that there will be a slowdown in the US that may or may not turn into a recession, that this will depress growth in Europe, but that growth in Asia will race on.
The parallel messages for the markets are similarly sober: a year when shares and bonds move sideways and that opportunities will be in specific areas that at present look bombed out, including banks and property.
In other words, most of the comment is on the lines of "more of the same". To say that is vastly to over-simplify, and there are interesting shades of difference between the protagonists: for example, while the balance of opinion is that the US will not have a recession next year, quite a few commentators put the possibility at evens. But the tone is almost universally cautious, and I think the explanation for that is that the professional forecasters have been pretty battered over the past year by their failure to pick up the dangers that the markets were running and the mayhem in the second half of this year.
I cannot find a single reference, on an admittedly quick look at last year's crop of forecasts, to the possibility of a liquidity crisis. Nor was there much about the possibility of the oil price doubling or the dollar falling as sharply as it has done. There were references, including some on these pages, to the overvaluation of house prices worldwide, and some of us reckoned that the end of this economic cycle would in some way be associated with falling property prices. But I know I saw the explosive growth of the hedge funds as the major source of potential weakness in the financial system, rather than the antics of mainstream banks. Some of the hedge funds have run into problems, but they have not destabilised the system, while the banks have.
Why did we miss this? The best explanation I have heard is the barbell one. On one side of the barbell are the experts who constructed the complicated financial instruments that bundled together the sub-prime debts and then created the off-balance sheet entities that apparently relieved the banks of these debts. They were so close to the minutiae of what they were doing that they did not appreciate the dangers or see the links in the financial system. On the other side of the barbell were the generalists, the economists and bankers, who understood the system but did not know enough about the intricacies of these instruments to see how they might unravel. Hardly anyone was in the middle, understanding both sides.
Are there similar black holes in our understanding now, and how severe will the consequences of these past months of mayhem be?
I don't think there is anything analogous to the credit crunch just round the corner, aside from the usual suspects of the financial imbalances between the US and Asia leading to a collapse of the dollar rather than the slow slide so far experienced. I suppose the dangers of some financial disruption in China or India should trouble people, but I think the main theme of the coming year will be sorting out the consequences of the past year's excesses. There are several more months of disruption to come.
You can see quite how suddenly the money market chaos struck from the first graph. It shows the gap between the three-month dollar interbank rate and the US Fed Funds target rate. The gap was dead steady until August, then suddenly shot all over the place. It is particularly wide at the moment as banks scramble to garner enough cash to make the year-end balance sheets look all right. Gradually next year it will come down, but banks all over the world will be reluctant to lend money except on watertight terms. Credit may become cheaper, but it will not become more available. As a result, power will shift to entities that have lots of cash, cash-rich companies, sovereign investment funds and the like. It will also shift regionally, towards the Middle East and Asia, and away from the US, and to a lesser extent the UK.
The shift of power away from the US will also be associated with some sort of slowdown there. That has already begun. The second graph shows some assessments from Barclays Capital of the profile of US and world growth through the second half of this year and then on through 2008. You see the main message: a sharp slowdown in the US (though not a recession) but a slower one for the world as a whole.
It would be naïve to think that the UK will escape unscathed, but I have only seen one prediction that we too might slip into recession next year. That comes from Saxo Bank in Copenhagen, which deliberately sets out some "outrageous predictions" - things that it does not expect to happen but just might. Among these are oil to $175 a barrel and a fall in the Chinese stock market of 40 per cent by year end. Were oil to go to that level the rest might follow.
Perhaps the most interesting question next year will be the ability of the emerging world, and in particular Asia, to decouple from the slowdown in the developed world. Can they race on if we slow down? To some extent the answer must be "yes", but I do think it is right to flag up some warnings.
One of the most alarming features of the past year, alarming in particular for the emerging economies, has been the surge in the price of food. You can see what has happened in the final graph. Part of the reason for that has been misplaced eco-friendly policies: taking food crops and turning them into fuel. But part has also been rising demand in China and elsewhere, including rising demand for meat. As living standards continue to rise throughout Asia such demand will probably carry on increasing. This is good news for the farmers of North America and Brazil, but it is adding to global inflation, and is particularly hard on poorer people in poorer countries. Rising food prices could bring serious disruption, social as well as economic, to the world next year.
The big point here is that we all know there will be some sort of downturn in the next couple of years but we don't know the timing or the severity.
My own instinct is that the year to worry about is 2009 rather than 2008, because I think there is sufficient momentum in the world economy to carry us through most of next year. But that may underestimate the severity of a US downturn.
Our parochial concern in the UK must surely be that were a downturn to come it would not be easy to offset a fall in demand by increasing the budget deficit, for we are not in as strong a fiscal position as we were in the last cycle. That may appear to be Alistair Darling's problem, but of course it is also ours.
NEWS - Commodites, Agriculture, Green Investment - NEWS
12/21/2007
National Fuel wants state to investigate hedge fund: Energy firm questions investor's compliance
(From Buffalo News (New York), provided by LexisNexis)
Publication: Buffalo News (New York)
David Robinson, The Buffalo News, N.Y.
Dec. 20--National Fuel Gas Co. is asking New York's utility regulators to investigate whether the hedge fund that wants to change the way the Amherst-based energy company is run is complying with the state's utility laws.
National Fuel, mirroring a move it made in Pennsylvania more than a month ago, on Wednesday asked the state Public Service Commission to determine whether New Mountain Vantage, which controls 9.7 percent of the company's stock, is trying to acquire a controlling interest in the company.
If the PSC were to rule that was the case, New Mountain could be forced to obtain approval from the commission to hold the shares. Regulators also could hold hearings on whether New Mountain's acquisition of National Fuel stock is in the public interest.
"Public utility law is designed to protect utility companies," said Julie Coppola Cox, a National Fuel spokeswoman. "Any entity like this that's trying to influence, or take over, a utility should be observant of those laws."
New Mountain is nominating its own slate of three directors in the February shareholder vote on the three open seats on National Fuel's board. The company also has recommended that National Fuel sell several of its businesses, change the ownership structure of others and speed up the pace of its drilling operations on the nearly 1 million acres of land the company controls in New York and Pennsylvania.
"National Fuel's petition is without merit," said Nina Devlin, a New Mountain spokeswoman. The investors believe their plan would increase shareholder value for National Fuel's stock holders, while "preserving the reliability" of its utility operations.
The filing "is merely another tactic being employed by National Fuel's entrenched board to frustrate the federal securities laws and to disenfranchise shareholders from electing the board
representatives they desire," Devlin said.
National Fuel, in its petition, alleges that New Mountain and "other hedge funds and similar entities" it has been acting in concert with control more than 20 percent of the company's stock, topping the 10 percent threshold that would require PSC approval.
The petition asks the PSC to force New Mountain to disclose how much stock the hedge fund and its allies have accumulated while "advancing its scheme to gain control of National through the purchase of stock by allies that remain cloaked in anonymity."
Devlin said New Mountain already has disclosed its direct holdings, as required by the Securities and Exchange Commission, and would update that information if it were to change.
In addition to accelerating its Appalachian drilling, New Mountain has recommended that National Fuel sell its smaller energy marketing, timber and landfill gas businesses, along with its Gulf of Mexico oil and natural gas wells, using the proceeds to buy back stock or pay a special dividend to shareholders.
National Fuel said it believes New Mountain, whose plans would effectively break up the company, should have sought approval from the PSC before it positioned itself to have "substantial influence and control" over the way the utility business is run.
A similar petition still is pending before the Pennsylvania Public Utility Commission.
Publication: Buffalo News (New York)
David Robinson, The Buffalo News, N.Y.
Dec. 20--National Fuel Gas Co. is asking New York's utility regulators to investigate whether the hedge fund that wants to change the way the Amherst-based energy company is run is complying with the state's utility laws.
National Fuel, mirroring a move it made in Pennsylvania more than a month ago, on Wednesday asked the state Public Service Commission to determine whether New Mountain Vantage, which controls 9.7 percent of the company's stock, is trying to acquire a controlling interest in the company.
If the PSC were to rule that was the case, New Mountain could be forced to obtain approval from the commission to hold the shares. Regulators also could hold hearings on whether New Mountain's acquisition of National Fuel stock is in the public interest.
"Public utility law is designed to protect utility companies," said Julie Coppola Cox, a National Fuel spokeswoman. "Any entity like this that's trying to influence, or take over, a utility should be observant of those laws."
New Mountain is nominating its own slate of three directors in the February shareholder vote on the three open seats on National Fuel's board. The company also has recommended that National Fuel sell several of its businesses, change the ownership structure of others and speed up the pace of its drilling operations on the nearly 1 million acres of land the company controls in New York and Pennsylvania.
"National Fuel's petition is without merit," said Nina Devlin, a New Mountain spokeswoman. The investors believe their plan would increase shareholder value for National Fuel's stock holders, while "preserving the reliability" of its utility operations.
The filing "is merely another tactic being employed by National Fuel's entrenched board to frustrate the federal securities laws and to disenfranchise shareholders from electing the board
representatives they desire," Devlin said.
National Fuel, in its petition, alleges that New Mountain and "other hedge funds and similar entities" it has been acting in concert with control more than 20 percent of the company's stock, topping the 10 percent threshold that would require PSC approval.
The petition asks the PSC to force New Mountain to disclose how much stock the hedge fund and its allies have accumulated while "advancing its scheme to gain control of National through the purchase of stock by allies that remain cloaked in anonymity."
Devlin said New Mountain already has disclosed its direct holdings, as required by the Securities and Exchange Commission, and would update that information if it were to change.
In addition to accelerating its Appalachian drilling, New Mountain has recommended that National Fuel sell its smaller energy marketing, timber and landfill gas businesses, along with its Gulf of Mexico oil and natural gas wells, using the proceeds to buy back stock or pay a special dividend to shareholders.
National Fuel said it believes New Mountain, whose plans would effectively break up the company, should have sought approval from the PSC before it positioned itself to have "substantial influence and control" over the way the utility business is run.
A similar petition still is pending before the Pennsylvania Public Utility Commission.
12/20/2007
Nord Pool plans to start electricity futures index
Nord Pool ASA, Europe's biggest power exchange, plans to start the region's first index based on electricity futures, allowing investors to bet on the direction of prices. A ``raw version'' of the index is ready and is yet to be tested, company spokesman Lars Galtung said by phone from Oslo today. He declined to say when the index will be published. Nordic Commodity Funds AB, an electricity hedge fund manager, is ready to start two funds tracking the index.
Will 2008 Be a Year of Growth or Hardship?
By Stephen Clayson
19 Dec 2007 at 02:30 PM GMT-05:00
LONDON (ResourceInvestor.com) -- The past few years have been characterised by good times for the world economy. Despite soaring oil prices, growth has been robust and inflation has not been an issue. Thanks to the resurgence of China there is now a new engine of world growth, and the effects of this sea change are being felt in all corners of the globe.
The effect on world economic growth of China’s return has been such that the recession that could have followed the bursting of the dotcom bubble never really bit, and the first years of the new millennium have been economically pretty benign. But this year, there is a feeling in some quarters, although by no means all, that the economic plain sailing may have to come to an end, at least temporarily.
Good times for the mining industry seem set to roll on. Despite the pressure felt by base metal prices in the past few weeks, there will be no return to the bad old days of the 1990s just yet. The fundamental clash between years of underinvestment in producing capacity and extraordinary demand growth hasn’t gone away.
Despite the underwhelming performance of gold so far this month – the smaller than hoped for cut in U.S. interest rates earlier this month facilitated a mini-rally in the dollar and stymied my hope for US$900 an ounce gold by Christmas – next year could be a halcyon one for the yellow metal.
Economic weakness in the U.S. will persist into next year and the Federal Reserve will likely be forced into making further cuts in interest rates. Although rates may fall elsewhere too – they have already begun to fall in the U.K. and may begin to fall in the eurozone – it is the U.S. economy that ultimately is at the heart of the sub-prime mortgage crisis that has been the big short term economic story of the second half of 2007.
Falling U.S. home prices spurred by sub-prime mortgage defaults, which are followed by repossessions and rushed sales, will rattle the U.S. consumer. Further falls in the dollar, which will come despite the palliative effect that its depreciation to date has had on the U.S. trade deficit, has the potential to generate a great deal of inflationary pressure in the U.S., but with the economy still weak, the Fed will be stuck between a rock and a hard place.
On the one hand, the Fed needs to stimulate economic activity, but on the other it has to control inflation and combat a perception that cheap money courtesy of Alan Greenspan’s Fed contributed to the U.S. housing boom, and now to the bust.
Why must the dollar keep falling? Because though the depreciation of the greenback so far has made a dent in the U.S. trade deficit, the deficit is still running at an unsustainable level. Furthermore, the dollar has yet to fully adjust to the reduced importance of the U.S. in the world economy and the arrival of the new engine I mentioned in this article’s opening paragraph.
Ultimately, the dollar still retains the support, for now, of East Asian governments and of the major oil producers. Until there is a decisive shift in the attitudes of these parties, particularly the former group – who choose to prop up the dollar in order to safeguard U.S. demand for their imports - then the greenback can’t complete the adjustment it needs to make.
But the willingness of overseas governments to fund U.S. borrowing will diminish as the country becomes a smaller part of the global economy, and sooner or later, the big players in the dollar prop-up game will look for something smarter to do with their money. That shift, if it takes place in 2008, won’t just be the story of the year, but of the decade and beyond.
The expectation of this impending rebalancing remains the major driver of the gold market, while the base metals and many other commodities ultimately depend on the health of that new engine, although tough economic times in the U.S. are unhelpful.
The economic tenor of 2008 depends on whether that engine can keep pulling the rest of the world along even while another great engine, the U.S. economy, is spluttering. The need for the dollar to fall further just makes things harder.
19 Dec 2007 at 02:30 PM GMT-05:00
LONDON (ResourceInvestor.com) -- The past few years have been characterised by good times for the world economy. Despite soaring oil prices, growth has been robust and inflation has not been an issue. Thanks to the resurgence of China there is now a new engine of world growth, and the effects of this sea change are being felt in all corners of the globe.
The effect on world economic growth of China’s return has been such that the recession that could have followed the bursting of the dotcom bubble never really bit, and the first years of the new millennium have been economically pretty benign. But this year, there is a feeling in some quarters, although by no means all, that the economic plain sailing may have to come to an end, at least temporarily.
Good times for the mining industry seem set to roll on. Despite the pressure felt by base metal prices in the past few weeks, there will be no return to the bad old days of the 1990s just yet. The fundamental clash between years of underinvestment in producing capacity and extraordinary demand growth hasn’t gone away.
Despite the underwhelming performance of gold so far this month – the smaller than hoped for cut in U.S. interest rates earlier this month facilitated a mini-rally in the dollar and stymied my hope for US$900 an ounce gold by Christmas – next year could be a halcyon one for the yellow metal.
Economic weakness in the U.S. will persist into next year and the Federal Reserve will likely be forced into making further cuts in interest rates. Although rates may fall elsewhere too – they have already begun to fall in the U.K. and may begin to fall in the eurozone – it is the U.S. economy that ultimately is at the heart of the sub-prime mortgage crisis that has been the big short term economic story of the second half of 2007.
Falling U.S. home prices spurred by sub-prime mortgage defaults, which are followed by repossessions and rushed sales, will rattle the U.S. consumer. Further falls in the dollar, which will come despite the palliative effect that its depreciation to date has had on the U.S. trade deficit, has the potential to generate a great deal of inflationary pressure in the U.S., but with the economy still weak, the Fed will be stuck between a rock and a hard place.
On the one hand, the Fed needs to stimulate economic activity, but on the other it has to control inflation and combat a perception that cheap money courtesy of Alan Greenspan’s Fed contributed to the U.S. housing boom, and now to the bust.
Why must the dollar keep falling? Because though the depreciation of the greenback so far has made a dent in the U.S. trade deficit, the deficit is still running at an unsustainable level. Furthermore, the dollar has yet to fully adjust to the reduced importance of the U.S. in the world economy and the arrival of the new engine I mentioned in this article’s opening paragraph.
Ultimately, the dollar still retains the support, for now, of East Asian governments and of the major oil producers. Until there is a decisive shift in the attitudes of these parties, particularly the former group – who choose to prop up the dollar in order to safeguard U.S. demand for their imports - then the greenback can’t complete the adjustment it needs to make.
But the willingness of overseas governments to fund U.S. borrowing will diminish as the country becomes a smaller part of the global economy, and sooner or later, the big players in the dollar prop-up game will look for something smarter to do with their money. That shift, if it takes place in 2008, won’t just be the story of the year, but of the decade and beyond.
The expectation of this impending rebalancing remains the major driver of the gold market, while the base metals and many other commodities ultimately depend on the health of that new engine, although tough economic times in the U.S. are unhelpful.
The economic tenor of 2008 depends on whether that engine can keep pulling the rest of the world along even while another great engine, the U.S. economy, is spluttering. The need for the dollar to fall further just makes things harder.
Volatility Churns up Opportunities and Dangers in Ag Markets
By Jacob Bunge, Financial Correspondent and Michael S. Fischer, Senior Financial Correspondent
Wednesday, December 19, 2007 6:09:08 PM ET
CHICAGO and LONDON (HedgeWorld.com)—Commodity trading advisers see big possibilities in the agricultural markets for 2008, if investors can navigate the rising volatility that's rocked the markets in the past year.
For professional traders, 2007 has been a year of transition in the agricultural markets, as they adjust to the new and heightened level of volatility that might be their new reality. Emerging markets' demand for raw materials and government-mandated biofuel programs are tightening supplies and lifting prices of agricultural commodities, while electronic trading drives ever-growing volume and new players are drawn to the markets by contracts' record highs.
Doug Carper, president and head trader of Lincoln, Neb.-based DEC Capital Inc., said he's reminded of the changes faced by energy traders as they watched prices in those markets double, and in some cases, triple. "A lot of people in that area had a difficult time transitioning to a much higher price plane," he said. "I think it's a case where professionals have to be more sensitive to managing volatility risk than ever before."
Mr. Carper speaks from experience. His vehicle, the DEC Futures Fund, got off to "a pretty good start" in 2007 and was up sharply in the first quarter, only to suffer through a deep decline in the second. Recovery began in the late summer, he said, but the fund's performance remained negative until the fourth quarter. He said he's currently projecting the fund would end the year with a 10% gain. Since inception, the vehicle has returned an annualized 17%.
Another firm that weathered 2007's significant volatility is Milwaukee-based Brock Capital Management LLC. Its Discretionary Agricultural Program lost 17% over August and September, only to rebound with a 14.7% gain in October. That month the program benefited most from a long position in orange juice and especially a short position in wheat, which paid off nicely, according to the firm's principal and manager Richard A. Brock.
"In 2007, for the first six months, there was no persistent trend at all and very choppy markets in the grains—if you happened to catch the bull market in wheat, that was pretty much the only good opportunity, but you still could've lost it all in the choppiness of corn and beans," Mr. Brock said. "The opportunities came in the second half."
The program is currently sitting on a 1.1% return for the year, though December's performance would probably add to that total, Mr. Brock said. He also predicted that his program would see big gains over the next two to three months as grain markets reached their peaks. "Ags, I think, were some of the best opportunities across all the commodities these past couple months, and that's going to continue for the next six months," he said.
But with the continuing high level of volatility in these markets, not much is certain. This year's bull market in wheat, for example, came as a surprise to Mr. Brock, and he now attributes it to heavy buying by index funds. At the peak, he said, index funds' position amounted to 250% of the crop, and as such their buying power far exceeded many traders' expectations. On the other hand, when the index funds stop buying, traders face downside risk. This was what provided Brock Capital's October windfall in the wheat market.
"I think that's where the soybean market is right now," Mr. Brock said. "[Index funds] have large long positions in soybeans and corn now, and unless they have more cash coming in the next few months … it will start to wane a little bit. Bull markets need cash to keep coming in. We saw it in wheat."
Index Funds and Other Influences
These phenomena, however, reflect a deeper change in the agricultural markets brought about by the arrival of index fund money. The real impact became obvious late in the first quarter of 2007, Mr. Brock said, and agricultural traders have had to adapt quickly to the new environment.
"As long as you recognize [index funds' presence], it can work in your favor, but it's important to recognize it changes the fundamental structure of a market," said Mr. Brock. "Markets don't react the way they used to, and that's why a lot of technical trading systems have had difficulties in the past couple of years, particularly in ags, because the market doesn't trend that well anymore."
At DEC Capital, Mr. Carper said he sees another factor—much of the volume going into trading floors and listed exchanges is being driven by hedge funds and other vehicles hedging over-the-counter transactions. Many of these transactions, Mr. Carper said, are very complex and the risk is difficult to manage, while the transparency is nowhere near the level required of CTAs. "It's wild, very wild," he said. "I would say that's a dynamite situation that could just get completely out of control."
Meanwhile, the growing momentum behind biofuel is exacerbating an already tight supply for agricultural commodities both domestically and globally, according to Mr. Carper. "[Biofuel] sounds wonderful, and it's like pulling a rabbit out of a hat for some politicians, but naturally it's disrupting the supply dramatically," he said.
Food prices are far more inelastic than fuel, Mr. Carper said, but they cannot compete against mandated demand. "So we have what could turn out to be a spectacular story unfolding here, but it could be spectacularly more so with any kind of hiccup or disruption in supply," he said. "We're trading on some uncharted territory, not only on prices, but on policy."
Not everyone foresees soaring prices. Mr. Brock, who described himself as something of a contrarian, said he believes the markets are on the brink of a long-term downtrend in energies, as those markets have already discounted all the bullish news that's come their way. "In 2008, overall, we'll see the opposite of 2007," he said. "It was a year of inflationary trends in agriculture and energy commodities, and I think 2008 will bring bear markets for both. . . . We're short the world."
Ags in 2007 and a Look Ahead
In their year-end commodities review, analysts at London-based ETF Securities wrote that in 2007, the attention of many agricultural commodities, propelled by high oil prices, turned from food to fuel. As the year progressed, this became a political issue that resulted in some countries reducing their exports or implementing export taxes. Resulting increases in food prices caused unrest among the public and a number of countries.
Besides new sources of demand such as ethanol, many agricultural commodities suffered from weather extremes while record-low inventories have supported prices and added to the effect of any supply disruptions caused by weather, according to the report. In addition, many commodities felt rising input costs, which are driven by rising energy prices and in particular rising fertilizer costs owing to rising demand.
Following is ETF Securities' roundup of the 2007 performance of agricultural commodities and the outlook for 2008:
The DJ-AIG Cotton Total Return Sub-Index was just about flat over the past 12 months. The positive effects of U.S. acreage rotation from cotton to corn and expectations of further rotations to wheat and other grains have been largely negated by increasing yields and higher-than-expected production in the United States. Long term, rising wealth levels in emerging markets may bode well for cotton demand.
The DJ-AIG Sugar Total Return Sub-Index fell by 20% over the past 12 months. High sugar prices in 2006 led to production increases in three large exporters, Brazil, India and Thailand, and to a sizeable global market surplus in 2007. Positive factors going forward include higher energy prices that will increase demand for sugar-based ethanol in Brazil, and higher corn prices, which should encourage substitution away from high-fructose corn syrup to sugar.
The DJ-AIG Coffee Total Return Sub-Index decreased by 4.5% over the past 12 months. Looking ahead, positive portents include tightening of land availability in Brazil as coffee, soybeans and sugar compete for acreage. In addition, coffee consumption has steadily increased in Japan and China, traditionally tea-drinking countries.
The DJ-AIG Corn Total Return Sub-Index fell by 4% over the past 12 months. After surging in 2005 and 2006, driven by burgeoning demand from ethanol-producing facilities, corn prices stabilized in 2007 because of record production in both the United States and worldwide. China, the world's fourth-largest corn exporter in 2006, could soon become a net importer of corn for the first time in more than a decade. China also suspended approvals for corn-based ethanol projects in an attempt to keep food price inflation under control. World inventories for 2008 are forecast at 14% of global demand, the lowest level seen in more than three decades. Despite massive crop rotation toward corn acreage this year, the United States is expected to achieve only a modest surplus, and the world market is expected to remain in deficit.
The DJ-AIG Wheat Total Return Sub-Index increased by 56% over the past 12 months. Wheat prices hit a record high in October because of all-time low inventories and weather-related supply disruptions in various place around the world. Since October, prices have receded on expectations that high prices could reduce feed demand and increase incentives to plant more winter wheat acres.
The DJ-AIG Soybean Total Return Sub-Index and the DJ-AIG Soybean Oil Total Return Sub-Index increased by 53% and 48%, respectively, over the past 12 months. Soybean oil prices are highly correlated with soybean prices. The surge was driven on the supply side by a sharp decline in soybean acreage in 2007, a direct consequence of crop rotation from soybeans to corn, which will likely lead to a sharp drawdown in U.S. and world inventories. Prices also were supported by supply disruptions in wheat that motivated feed substitution toward corn and soybeans. The trend also was reinforced by market concerns over dry weather in Brazil. On the demand side, growth from Asia was strong, led by China's demand for feed. The strength of both soybean and soybean oil prices has also been associated with rapidly increasing demand from bio-diesel production facilities, which in turn has been supported by high energy prices.
Wednesday, December 19, 2007 6:09:08 PM ET
CHICAGO and LONDON (HedgeWorld.com)—Commodity trading advisers see big possibilities in the agricultural markets for 2008, if investors can navigate the rising volatility that's rocked the markets in the past year.
For professional traders, 2007 has been a year of transition in the agricultural markets, as they adjust to the new and heightened level of volatility that might be their new reality. Emerging markets' demand for raw materials and government-mandated biofuel programs are tightening supplies and lifting prices of agricultural commodities, while electronic trading drives ever-growing volume and new players are drawn to the markets by contracts' record highs.
Doug Carper, president and head trader of Lincoln, Neb.-based DEC Capital Inc., said he's reminded of the changes faced by energy traders as they watched prices in those markets double, and in some cases, triple. "A lot of people in that area had a difficult time transitioning to a much higher price plane," he said. "I think it's a case where professionals have to be more sensitive to managing volatility risk than ever before."
Mr. Carper speaks from experience. His vehicle, the DEC Futures Fund, got off to "a pretty good start" in 2007 and was up sharply in the first quarter, only to suffer through a deep decline in the second. Recovery began in the late summer, he said, but the fund's performance remained negative until the fourth quarter. He said he's currently projecting the fund would end the year with a 10% gain. Since inception, the vehicle has returned an annualized 17%.
Another firm that weathered 2007's significant volatility is Milwaukee-based Brock Capital Management LLC. Its Discretionary Agricultural Program lost 17% over August and September, only to rebound with a 14.7% gain in October. That month the program benefited most from a long position in orange juice and especially a short position in wheat, which paid off nicely, according to the firm's principal and manager Richard A. Brock.
"In 2007, for the first six months, there was no persistent trend at all and very choppy markets in the grains—if you happened to catch the bull market in wheat, that was pretty much the only good opportunity, but you still could've lost it all in the choppiness of corn and beans," Mr. Brock said. "The opportunities came in the second half."
The program is currently sitting on a 1.1% return for the year, though December's performance would probably add to that total, Mr. Brock said. He also predicted that his program would see big gains over the next two to three months as grain markets reached their peaks. "Ags, I think, were some of the best opportunities across all the commodities these past couple months, and that's going to continue for the next six months," he said.
But with the continuing high level of volatility in these markets, not much is certain. This year's bull market in wheat, for example, came as a surprise to Mr. Brock, and he now attributes it to heavy buying by index funds. At the peak, he said, index funds' position amounted to 250% of the crop, and as such their buying power far exceeded many traders' expectations. On the other hand, when the index funds stop buying, traders face downside risk. This was what provided Brock Capital's October windfall in the wheat market.
"I think that's where the soybean market is right now," Mr. Brock said. "[Index funds] have large long positions in soybeans and corn now, and unless they have more cash coming in the next few months … it will start to wane a little bit. Bull markets need cash to keep coming in. We saw it in wheat."
Index Funds and Other Influences
These phenomena, however, reflect a deeper change in the agricultural markets brought about by the arrival of index fund money. The real impact became obvious late in the first quarter of 2007, Mr. Brock said, and agricultural traders have had to adapt quickly to the new environment.
"As long as you recognize [index funds' presence], it can work in your favor, but it's important to recognize it changes the fundamental structure of a market," said Mr. Brock. "Markets don't react the way they used to, and that's why a lot of technical trading systems have had difficulties in the past couple of years, particularly in ags, because the market doesn't trend that well anymore."
At DEC Capital, Mr. Carper said he sees another factor—much of the volume going into trading floors and listed exchanges is being driven by hedge funds and other vehicles hedging over-the-counter transactions. Many of these transactions, Mr. Carper said, are very complex and the risk is difficult to manage, while the transparency is nowhere near the level required of CTAs. "It's wild, very wild," he said. "I would say that's a dynamite situation that could just get completely out of control."
Meanwhile, the growing momentum behind biofuel is exacerbating an already tight supply for agricultural commodities both domestically and globally, according to Mr. Carper. "[Biofuel] sounds wonderful, and it's like pulling a rabbit out of a hat for some politicians, but naturally it's disrupting the supply dramatically," he said.
Food prices are far more inelastic than fuel, Mr. Carper said, but they cannot compete against mandated demand. "So we have what could turn out to be a spectacular story unfolding here, but it could be spectacularly more so with any kind of hiccup or disruption in supply," he said. "We're trading on some uncharted territory, not only on prices, but on policy."
Not everyone foresees soaring prices. Mr. Brock, who described himself as something of a contrarian, said he believes the markets are on the brink of a long-term downtrend in energies, as those markets have already discounted all the bullish news that's come their way. "In 2008, overall, we'll see the opposite of 2007," he said. "It was a year of inflationary trends in agriculture and energy commodities, and I think 2008 will bring bear markets for both. . . . We're short the world."
Ags in 2007 and a Look Ahead
In their year-end commodities review, analysts at London-based ETF Securities wrote that in 2007, the attention of many agricultural commodities, propelled by high oil prices, turned from food to fuel. As the year progressed, this became a political issue that resulted in some countries reducing their exports or implementing export taxes. Resulting increases in food prices caused unrest among the public and a number of countries.
Besides new sources of demand such as ethanol, many agricultural commodities suffered from weather extremes while record-low inventories have supported prices and added to the effect of any supply disruptions caused by weather, according to the report. In addition, many commodities felt rising input costs, which are driven by rising energy prices and in particular rising fertilizer costs owing to rising demand.
Following is ETF Securities' roundup of the 2007 performance of agricultural commodities and the outlook for 2008:
The DJ-AIG Cotton Total Return Sub-Index was just about flat over the past 12 months. The positive effects of U.S. acreage rotation from cotton to corn and expectations of further rotations to wheat and other grains have been largely negated by increasing yields and higher-than-expected production in the United States. Long term, rising wealth levels in emerging markets may bode well for cotton demand.
The DJ-AIG Sugar Total Return Sub-Index fell by 20% over the past 12 months. High sugar prices in 2006 led to production increases in three large exporters, Brazil, India and Thailand, and to a sizeable global market surplus in 2007. Positive factors going forward include higher energy prices that will increase demand for sugar-based ethanol in Brazil, and higher corn prices, which should encourage substitution away from high-fructose corn syrup to sugar.
The DJ-AIG Coffee Total Return Sub-Index decreased by 4.5% over the past 12 months. Looking ahead, positive portents include tightening of land availability in Brazil as coffee, soybeans and sugar compete for acreage. In addition, coffee consumption has steadily increased in Japan and China, traditionally tea-drinking countries.
The DJ-AIG Corn Total Return Sub-Index fell by 4% over the past 12 months. After surging in 2005 and 2006, driven by burgeoning demand from ethanol-producing facilities, corn prices stabilized in 2007 because of record production in both the United States and worldwide. China, the world's fourth-largest corn exporter in 2006, could soon become a net importer of corn for the first time in more than a decade. China also suspended approvals for corn-based ethanol projects in an attempt to keep food price inflation under control. World inventories for 2008 are forecast at 14% of global demand, the lowest level seen in more than three decades. Despite massive crop rotation toward corn acreage this year, the United States is expected to achieve only a modest surplus, and the world market is expected to remain in deficit.
The DJ-AIG Wheat Total Return Sub-Index increased by 56% over the past 12 months. Wheat prices hit a record high in October because of all-time low inventories and weather-related supply disruptions in various place around the world. Since October, prices have receded on expectations that high prices could reduce feed demand and increase incentives to plant more winter wheat acres.
The DJ-AIG Soybean Total Return Sub-Index and the DJ-AIG Soybean Oil Total Return Sub-Index increased by 53% and 48%, respectively, over the past 12 months. Soybean oil prices are highly correlated with soybean prices. The surge was driven on the supply side by a sharp decline in soybean acreage in 2007, a direct consequence of crop rotation from soybeans to corn, which will likely lead to a sharp drawdown in U.S. and world inventories. Prices also were supported by supply disruptions in wheat that motivated feed substitution toward corn and soybeans. The trend also was reinforced by market concerns over dry weather in Brazil. On the demand side, growth from Asia was strong, led by China's demand for feed. The strength of both soybean and soybean oil prices has also been associated with rapidly increasing demand from bio-diesel production facilities, which in turn has been supported by high energy prices.
Grains Top Performing Commodity Class of 2007
By Jon A. Nones
19 Dec 2007 at 06:16 PM GMT-05:00
St. LOUIS (ResourceInvestor.com) -- The grains complex has had a stellar year, outperforming energies, precious metals and base metals in 2007. Although corn has gained just 16% this year, soybeans are up 56% while wheat is 95% higher! Only time will tell if the long-term supply / demand fundamentals of agriculture will remain strong throughout 2008, but analyst say bullish factors still remain.
“Metals, oil and gold are dependent on the outlook for economic growth and also the financial markets. On the other hand, the factors which have caused grains to rise spectacularly this year still remain,” said Nik Bienkowski, CFA, director of marketing and research at ETF Securities, in speaking to RI.
In its “Commodities Review 2007, ETF Securities notes that its broad grains indexes are up over 40% on average due to global warming, extreme weather and demand for ethanol. In comparison, the company’s petroleum indexes are up over 30% and precious metals indexes are up about 20% this year.
*
The DJ-AIG Grains Index [LSE:AIGG] and the DJ-AIG Grains 3 Month Forward Index [LSE:GRAF] increased by 36% and 48.8% respectively over the past twelve months.
*
DJ-AIG Petroleum Index [LSE:AIGO] and the DJ-AIG Petroleum 3 Month Forward Index [LSE:FPET] were up 32% and 35%.
*
The DJ-AIG Precious Metals Index [LSE:AIGP] and the ETFS Physical PM Basket [LSE:PHPM] were both up by 17% and 21%.
Looking at specific prices, gold has increased by 26% over the past 12 months, while silver is up only 7%. Likewise, platinum has gained 28%, while sister metal palladium is up just 6%. Crude prices have gained 48% and uranium prices are up 25%. Among base metals, lead is the big winner with a 50% gain; then tin at 45%, cobalt 40% and molybdenum 30%, while other industrial metals are down.
Gains in wheat, soybeans and, to a lesser extent, corn this year have been driven by demand from ethanol fuel, Chinese demand and imports especially for soybeans, low inventories that continue to fall, falling land availability, decreasing returns from yield enhancements, a growing population and the effects of extreme weather patterns such as flood, drought and frost, according to ETF Securities.
Wheat
The DJ-AIG Wheat Index [LSE:WEAT] increased by 56% over the past 12 months due to droughts, floods and low inventories. Wheat prices have soared to all-time highs, touching $9.80 per bushel this month, amid record low inventories and a series of weather-related supply disruptions in different areas of the globe.
Australia, previously the world’s second largest exporting country in 2005, had its harvest forecast reduced for the second consecutive year due to severe droughts, down from 25 million tonnes in 2005 to 10 million tonnes in 2006 and 13 million tonnes in 2007. At 18% of annual demand in 2008, global wheat inventories are expected to be at their lowest level in more than 40 years.
Earlier this month, the USDA lowered its estimate for 2007-08 U.S. ending stocks by 32 million bushels to 280 million bushels, a 10% drop, which would be the lowest level in 60 years. Inventories in storage will fall 32% from a year ago to 8.49 million tonnes by May 31.
Meanwhile, demand from India, the world's second-biggest consumer of the grain behind China, has risen substantially amid slumping global inventories. India had about 9 million tonnes in storage on Nov. 23, enough to meet domestic demand for nine months. The government said in October it wants to buy 1 million tonnes more in case of emergencies.
Matthew Sena, CFA at Castlestone Management LLC, told RI that demand for wheat has stayed strong in spite of high prices and should continue to grow at a moderate pace. But he said that high prices will spur increased planted acreage and this should ease the supply crunch, barring continued poor production.
“For 2008, I expect both soybeans and corn to outperform and for wheat to underperform,” he said.
Soybeans
The DJ-AIG Soybean Index [LSE:SOYB] and the DJAIG Soybean Oil Index [LSE:SOYO] increased by 53% and 48% respectively over the past 12 months due decreasing crop acreage and robust Chinese demand growth. Soybean and soybean oil prices are hitting all-time highs, approaching $11.60 per bushel and 50 cents per pound, respectively.
According to ETF Securities, the sharp decline in soybean acreage this year was a direct consequence of crop rotation from soybeans to corn, which is also expected to result in a sharp drawdown in U.S. and world inventories. This was further compounded by supply disruptions in wheat, which motivated feed substitution towards corn and soybeans.
On the demand side, Chinese demand has risen steadily since 1995 when the country turned into a net importer of soybeans. China’s share of world imports has increased rapidly to 45%. According to analysts, China's soybean imports may grow by 9.6% on an annual basis this year to 31 million tonnes and increase to 45 million tonnes by 2012.
Sena said soybeans lost acreage last year despite increased demand, and demand should continue to grow in China and other developing nations.
“As per-capital income increases in developing nations, people are consuming higher protein diets; the production of greater amounts of meat requires feed in the form of corn and soy meal,” he said. “More corn used for ethanol will likely translate into increased need for soy meal as livestock feed.”
Strength in soybean and soybean oil prices has also been associated with rapidly increasing demand from bio-diesel production facilities due to higher crude prices, currently close to $90 per barrel. Presently, the U.S. has 53 biodiesel plants operating, with 38 more under construction and 22 additional plants being planned.
According to the DOA Farm Service Agency, one bushel of soybeans yields approximately 1.4 gallons of bio-diesel. Soybeans contain about 20% oil, so it takes almost 7.3 pounds of soybean oil to produce a gallon of bio-diesel.
Corn
The DJ-AIG Corn Index [LSE:CORN] fell by 4% over the past 12 months due to record production. U.S. corn acreage increased 18.5% this year from 78.3 to 92.9 million acres - a level not seen since 1944.
But corn prices surged in 2006 by more than 360%, driven by rapidly increasing demand from ethanol-producing facilities. Prices only stabilized in 2007 after more acreage was allotted to corn by farmers to take advantage of high prices.
“The same increase in acreage, however, is impossible to repeat in the short term, and in fact corn is likely to lose acreage to both wheat and soybeans,” said Sena.
Despite the massive crop rotation towards corn acreage this year, the U.S. is expected to achieve only a modest surplus, and the world market is expected to remain in deficit. The market is predicting 88.9 million acres as compared to 93.6 million acres in 2007. World inventories for 2008 are forecast at 14% of global demand, their lowest level in more than 30 years.
There are also indications that China, the world’s fourth largest corn exporter in 2006, could soon become a net importer of corn for the first time in more than a decade. In 2005-2006, the country harvested 139.37 million tonnes of corn. The domestic corn market was balanced roughly with consumption totalling 137.4 million tonnes and the export of 3.79 million tonnes.
Furthermore, China announced plans this week to cancel the current 13% export tax rebate on corn on Dec. 20 this year. The new grain export policy is aimed at restraining China's grain exports and ensuring domestic supply in order to cool prices. China also suspended approvals for corn-based ethanol projects in an attempt to keep food price inflation under control.
On the other side of the world, President Bush earlier today signed into law the “Energy Independence and Security Act,” which includes a historic Renewable Fuels Standard (RFS) calling for at least 36 billion gallons of ethanol to be used nationwide by 2022. It calls for 15 billion gallons per year of corn-based ethanol and another 21 billion gallons from “advanced bio-fuels” that use materials other than food crops.
“The recent farm and energy legislation is protective of the American farmer and mandates increases in corn-ethanol use over the next decade plus,” Sena confirmed.
Ethanol fuel is consuming 20% of last year's corn crop and is expected to gobble up more than 25% of this year's crop. This is up drastically from 5% in 2004 and 6% in 2005. U.S. ending stocks to usage ratio for the 2006/2007 crop year is pegged at 10.2%, the 4th lowest on record.
U.S. ethanol production is up almost 30% over last year with new production facilities coming online regularly. There are over 100 ethanol plants in operation at present in the U.S., but 40 more are in the making. Right now, there are 900 gas stations selling 85% ethanol (E85).
Darin Newsom, DTN senior analyst, said demand was expected to grow even before the signing of the Energy Bill, with 2.115 billion bushels projected to be used in 2007-2008 for ethanol and 3.2 billion bushels in 2008-2009.
He said the corn market is poised to begin its third leg of the long-term uptrend that began in late 2005 when the front-month contract was trading near $1.86. The second leg ran from $2.64 1/4 to $4.37 1/4. He predicts the third leg will push prices to between $6.10 and $6.50, most likely occurring in the last quarter of 2008.
“The corn market does indeed look like it will make the next big move - as far as grain markets are concerned,” concluded Newsom.
March corn rose 2.75 cents to settle at $4.3475 a bushel today on the Chicago Board of Trade, while March wheat advanced 21.5 cents to $9.7350 a bushel and January soybeans climbed 9.25 cents to close at $11.59 a bushel.
Gold steady around $800, platinum near record
Thu Dec 20, 2007 2:01am EST
(Adds closing in Tokyo)
Lewa Pardomuan
SINGAPORE, Dec 20 (Reuters) - Gold was steady around $800
an ounce on Thursday despite a firming U.S. dollar, while
platinum dropped but held near a record high on supply
concerns.
Thin market conditions meant platinum was prone to sharp
fluctuations after it hit an all-time high of $1,519 an ounce
on Tuesday on worries of a likely market deficit in 2008.
Spot gold rose as high as $803 an ounce before
slipping to $800.00/800.80 an ounce, down from $801.10/801.80
late in New York on Wednesday.
Gold was likely to trade in a volatile $780 and $820 range
until the end of the year, said some dealers, but may challenge
last month's 28-year high when players return from holidays in
early 2008.
"Given the movements in the U.S. dollar in the past week, I
actually think the gold price is surprisingly resilient," said
David Moore, a commodity analyst at the Commonwealth Bank of
Australia in Sydney.
"One of the key supports, which you know is the fragility
of the U.S. dollar, has been less apparent," he said.
Expectations of further U.S. rate cuts, record-high crude
oil CLc1 and uncertainty in the U.S. credit market propelled
gold to above $845 last month -- a whisker away from the record
peak of $850 hit in 1980.
"Many have already taken their Christmas holidays. I would
expect the situation to remain like this until the end of the
year. I would say $790 and $815 is the range for the rest of
the year," Peter Tse, a dealer at Scotia Mocatta in Hong Kong,
said.
The dollar eased to 113.19 yen but stayed in a range
of 113.60 yen hit last week for the first time since early
November, aided by short covering before investors close their
books at the end of the year.
The euro hardly moved at $1.4385 , having
fallen to $1.4325 the previous day, its lowest since late
October. A firmer dollar makes dollar-priced gold more
expensive for holders of other currencies.
Platinum hit a high of $1,515 an ounce but then
dropped to $1,504/1,509 an ounce, down from $1,516/1,521 in New
York on Wednesday.
Johnson Matthey (JMAT.L: Quote, Profile, Research), the world's main platinum refiner
and fabricator, said in November the market would change course
in 2007 and see a deficit of 265,000 ounces. It had a surplus
of 65,000 ounces in 2006 after seven successive years of
deficits.
Platinum was bolstered by a rising lease rate, triggered by
buying from commodity funds and banks.
Tokyo dealers said investments banks appeared to have
tapped the lease market because they wanted to avoid holding
short positions in platinum at times when credit concerns
stayed in the financial market.
Recent strength in Japanese platinum futures <0#JPL:>,
which are in a steep backwardation, provided overall support.
The most active December 2008 contract ended 16 yen per gram
lower at 5,245 yen after hitting a high of 5,282 yen.
Palladium fell to $352/356 an ounce from $355/360 in
New York. Silver edged down to $14.03/14.08 an ounce
from $14.09/14.14 late in New York.
Precious metals prices at 0642 GMT
Metal Last Change Pct chg YTD pct chg
Turnover
Spot Gold 800.30 -1.60 -0.20 25.89
Spot Silver 14.04 -0.07 -0.50 9.26
Spot Platinum 1505.00 -11.00 -0.73 32.95
Spot Palladium 352.00 0.00 +0.00 6.02
TOCOM Gold 2937.00 -8.00 -0.27 20.12
45013
TOCOM Platinum 5245.00 -16.00 -0.30 23.30
39722
TOCOM Silver 516.80 0.90 +0.17 4.76
786
TOCOM Palladium 1307.00 -20.00 -1.51 4.14
875
Euro/Dollar 1.4369
Dollar/Yen 113.20
TOCOM prices in yen per gram, except TOCOM silver which is
priced in yen per 10 grams. Spot prices in $ per ounce.
(Additional reporting by Chikafumi Hodo in Tokyo; Editing
by Michael Urquhart)
(Adds closing in Tokyo)
Lewa Pardomuan
SINGAPORE, Dec 20 (Reuters) - Gold was steady around $800
an ounce on Thursday despite a firming U.S. dollar, while
platinum dropped but held near a record high on supply
concerns.
Thin market conditions meant platinum was prone to sharp
fluctuations after it hit an all-time high of $1,519 an ounce
on Tuesday on worries of a likely market deficit in 2008.
Spot gold
slipping to $800.00/800.80 an ounce, down from $801.10/801.80
late in New York on Wednesday.
Gold was likely to trade in a volatile $780 and $820 range
until the end of the year, said some dealers, but may challenge
last month's 28-year high when players return from holidays in
early 2008.
"Given the movements in the U.S. dollar in the past week, I
actually think the gold price is surprisingly resilient," said
David Moore, a commodity analyst at the Commonwealth Bank of
Australia in Sydney.
"One of the key supports, which you know is the fragility
of the U.S. dollar, has been less apparent," he said.
Expectations of further U.S. rate cuts, record-high crude
oil CLc1 and uncertainty in the U.S. credit market propelled
gold to above $845 last month -- a whisker away from the record
peak of $850 hit in 1980.
"Many have already taken their Christmas holidays. I would
expect the situation to remain like this until the end of the
year. I would say $790 and $815 is the range for the rest of
the year," Peter Tse, a dealer at Scotia Mocatta in Hong Kong,
said.
The dollar eased to 113.19 yen
of 113.60 yen hit last week for the first time since early
November, aided by short covering before investors close their
books at the end of the year.
The euro
fallen to $1.4325 the previous day, its lowest since late
October. A firmer dollar makes dollar-priced gold more
expensive for holders of other currencies.
Platinum
dropped to $1,504/1,509 an ounce, down from $1,516/1,521 in New
York on Wednesday.
Johnson Matthey (JMAT.L: Quote, Profile, Research), the world's main platinum refiner
and fabricator, said in November the market would change course
in 2007 and see a deficit of 265,000 ounces. It had a surplus
of 65,000 ounces in 2006 after seven successive years of
deficits.
Platinum was bolstered by a rising lease rate, triggered by
buying from commodity funds and banks.
Tokyo dealers said investments banks appeared to have
tapped the lease market because they wanted to avoid holding
short positions in platinum at times when credit concerns
stayed in the financial market.
Recent strength in Japanese platinum futures <0#JPL:>,
which are in a steep backwardation, provided overall support.
The most active December 2008 contract ended 16 yen per gram
lower at 5,245 yen after hitting a high of 5,282 yen.
Palladium
New York. Silver
from $14.09/14.14 late in New York.
Precious metals prices at 0642 GMT
Metal Last Change Pct chg YTD pct chg
Turnover
Spot Gold 800.30 -1.60 -0.20 25.89
Spot Silver 14.04 -0.07 -0.50 9.26
Spot Platinum 1505.00 -11.00 -0.73 32.95
Spot Palladium 352.00 0.00 +0.00 6.02
TOCOM Gold 2937.00 -8.00 -0.27 20.12
45013
TOCOM Platinum 5245.00 -16.00 -0.30 23.30
39722
TOCOM Silver 516.80 0.90 +0.17 4.76
786
TOCOM Palladium 1307.00 -20.00 -1.51 4.14
875
Euro/Dollar 1.4369
Dollar/Yen 113.20
TOCOM prices in yen per gram, except TOCOM silver which is
priced in yen per 10 grams. Spot prices in $ per ounce.
(Additional reporting by Chikafumi Hodo in Tokyo; Editing
by Michael Urquhart)
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