Benedicte Gravrand, Opalesque London: Agricultural commodities have always been a riskier part of the commodities market. But due to its inherent volatility, it is a good place to hedge, using leverage and futures contracts for example. The industry is also a good place to invest if you believe that the food production levels will have to increase dramatically to meet the needs of the rising population – so the likes of fertilizers might be a good bet. And if you believe that there is a food crisis, as stocks are dwindling and population is increasing, then betting on rising crop prices can be a good thing too.
Some fund managers agree that the de-correlated agricultural market is good for diversification but not for long-only investing, however (see Oct-09 Opalesque Exclusive here). And most say that, currently, most of the market is in contango and that inventories are too low.
Agricultural commodities (“agri”) were not really swayed by the 2008 crisis, except when investors sold everything. What really affects them are the weather, plantations and harvests, speculators, inventories, liquidity, the risks of contango (when the price of a commodity for future delivery is higher than the spot price) and backwardation (when the contract approaches expiration, the futures contract will trade at a higher price compared to when it was further away from expiration).
Some agri funds
Among the managers who are betting on agri and softs, we heard that Earth Capital Partners in London was planning to launch a sustainable agriculture fund early this year; that Optima, a $6bn FoHFs firm in New York, had launched $100m fund to invest in American farmland as fears of food inflation are growing; and that Clive Capital had closed a $4bln commodities hedge fund to new investors, which had returned 4% in November partly thanks to agriculture.
Among BarclayHedge’s indices, the Agricultural Traders Index was up 0.11% (est.) in December and -1.46% YTD (Barclay CTA Index was down 0.72% (est.) and up 0.62% YTD.)
According to the managers at Attunga Capital, an investment firm in Sydney, the agricultural markets in November hitched themselves to the US$ and global recovery bandwagons. When combined with large fund flows (current and projected), this sent the grain complex higher despite the bearish fundamentals surrounding large domestic and global supplies of wheat, corn and to a lesser extent soy. The sugar market continued drifting lower, which will test the resolve of the many large long positions of directional players.
The $10.9m Attunga Agricultural Trading (offshore) Fund invests in global exchange traded soft commodity and agricultural derivatives and securities. In November, it was down 5.73% since its June-09 inception (see Dec-09 Opalesque Exclusive: Attunga Capital announces new fund, new strategy and new hires for 2010 here).
The Lumix AgroDirect Fund, run by Lumix Capital Management in Switzerland, makes direct investments in the agricultural sector in Latin America, investing in the production of agricultural commodities in leased farmland. Production is outsourced to local agricultural operating partners, whom Lumix audits and controls. The fund also invests in ABL in the sector. Launched in August 2009, it has returned +2.96% since.
The GAIA World Agri Fund, launched in May 2008 and run by GAIA Capital Advisors, an investment advisory company based in Geneva, invests opportunistically in upstream farming operations, agri-land, equipment and technology and related businesses in emerging regions like the former Soviet Union, Africa, and LatAm. The fund invests globally, in equities only and not in physical commodities, futures or options. Class B of the fund gained 6.44% in November and is up 51.03% YTD – following last year’s 50% losses.
Last Supper for Malthus
GAIA was founded in 2006 by J. Coast Sullenger, who talked to Opalesque after the presentation of a film by Klaus Pas in London last month. The film, called “Last Supper for Malthus”, is a documentary on the possible outcome of a growing population. It pits two British economists against one another, Thomas Robert Malthus and David Ricardo, and brings in various experts who discuss the world population (now at 6.7 billion and expected to reach 9 billion in 2050), limited supply and the global food crisis.
Malthus, who died in 1834, wrote the “Principles of Population” which predicted that sooner or later population gets checked by famine, disease, and widespread mortality. He wrote, rather pessimistically; “The power of population is indefinitely greater than the power in the earth to produce subsistence for man”.
Ricardo, who died in 1823, was an opponent of protectionism for national economies, especially for agriculture. He believed that the British “Corn Laws” - tariffs on agriculture products - ensured that less-productive domestic land would be harvested and rents would be driven up (Parliament repealed the Corn Laws in 1846.)
Stocks and prices
The U.S.D.A., in its Dec-09 report called “World Agricultural Supply and Demand Estimates”, said it expects lower stocks in many of the products, such as coarse grain, rice, sugar, cotton. However, global wheat supplies and production and ending stocks are expected to be higher.
And some investors think that prices for agri and softs could well hike up again in 2010 – which could help the contango situation. The Goldman Sachs Commodity Index has recovered to levels around the 500 point mark, compared to about 350 points at the trough, said Daniel Zurbrugg, partner of Swiss firm Alpine Atlantic Global Asset Management, but the index is still far from the peak of 890 points in 2008 when prices were driven by a lot of speculation. He believes that the supply / demand situation (not the returning speculators) might push prices up 30% this year. Jim Rogers, the loud investor, is also stocking up on agris, apparently.
Tomorrow: Interview with GAIA’s J. Coast Sullenger.