Bullish Agri Commodities
The world may be going through an unprecedented economic downturn leading to falling stock markets, volatile commodities markets and collapse of banking giants. But some investors continue to be bullish in these times of extreme bearish markets. One such is global investment legend Jim Rogers.
Rogers, who shifted his residence from the United States to Singapore, “to live in Asia because things are happening in Asian countries, particularly China,” says he continues to be bullish on a select few commodities.
”I continue to be bullish on most agricultural commodities. I also look forward to big investment opportunities in commodities like crude oil, cotton and zinc,” Rogers said in a recent interview.
Rogers, chairman of Rogers Holdings, and a a vocal critic of America and Britain says commodities will be the place to put your money so that when the world comes out of the economic meltdown.
According to him, the tightness in the credit markets is leaving farmers unable to buy fertilizer. “No companies are opening new mines, leaving supply problems which will be followed by shortages,” he said pointing out that he expects commodities prices to naturally rebound in the next few years.
Recently, Rogers famously said that the pound was "finished" and he was putting all future hopes and investments in China. “The charm of United Kingdom is all over and it would be prudent to sell the pound fast,” he is quoted as saying.
According to Rogers, three billion people living in Asia, most of them in India and China, will account for a major portion of the total demand for commodities in the coming years.
A quick summary of this morning's headlines
Crude Oil Falls Below $90 on Concern Slowing Global Growth May Curb Demand
Palm Oil Dives to Near a 2-Year Low on Concern Demand Outlook Is Worsening
Soybeans Drop to 1-Year Low on Worsening Demand Outlook; Corn, Wheat Fall
Gold Drops in London as Dollar Gains; Platinum Approaches Three-Year Low
Natural Rubber Reaches 21-Month Low as Financial Crisis May Weaken Demand
Copper, Zinc, Aluminum Tumble by Trading Limit in Shanghai After Holidays
Euro Reaches 13-Month Low Versus Dollar as Credit Crisis Spreads to Europe
Not pretty is it?
Commodity Prices Face Meltdown
Recent price declines in the commodities sector are only just the tip of the iceberg. Over the coming weeks and months the entire complex faces "meltdown" with crude going to USD90/barrel and everything else going with it.
CBOT wheat $2/bushel lower than current levels. Australian wheat A$35-40 lower than current levels "not a problem at all."
Where on earth did I get all that from? Erm, would you believe Cargill's website?
You will need to be quick before this story disappears off the page:
Nurse!
Click the headline timed at 4.13EDT if it's still there. If it's disappeared off the bottom of the page then try here:
Parachutes & Tin Hats All Round
Commodity hedge fund collapses
Hedge fund manager Ospraie Management has said that it will close its flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resources equity holdings, in one of the biggest ever closures of a commodities-focused hedge fund.
The closure of the fund, announced by the firm's founder Dwight Anderson in a letter to investors on Tuesday, could be more bad news for Lehman Brothers, which took a 20 percent stake in the hedge fund manager in 2005.
The fund has slumped 38.6 percent this year because of bad bets on commodity stocks.
The shuttering of the Ospraie Fund, which opened in 1999 and managed $2.8 billion at the start of August, leaves Anderson's firm with three funds overseeing more than $4 billion of assets, down from $9 billion in March.
US Senator Plans To Bar Funds From Commodities
SAN FRANCISCO (MarketWatch) -- The head of the Senate's government affairs committee Wednesday unveiled a series of restrictive proposals aimed at financial speculators in commodities, including one that would place an outright ban on big pension funds buying agricultural and energy futures.
The three legislative ideas from Connecticut's Joe Lieberman, which the independent senator plans to discuss at a hearing June 24, count as the most drastic efforts yet from lawmakers targeting potential culprits behind high oil and grain prices.
The most severe would prohibit private and public pension funds with more than $500 million in assets from investing in agricultural and energy commodities traded on a U.S. futures exchange, foreign exchange or over the counter, according to materials provided by Lieberman's office.
A second plan would direct the Commodities Futures Trading Commission to establish total limits on the share of the commodity market held by financial investors.
A third proposal would direct the futures regulator to impose speculative-position limits on any stakes not related to real hedging activities, an action that could limit the commodities-swaps activities of big investment banks such as Goldman Sachs Group and Morgan Stanley.
"We are not, as some continue to argue, witnessing the ebb and flow of natural market forces at work. We are instead seeing excessive market speculation at work and that is why our government must step in with new laws to protect our economy and our consumers," said Lieberman in a statement.
Lieberman will most likely introduce legislation with Sen. Susan Collins, R-Maine, after the July 4 holiday recess, said a staff representative of Lieberman. That legislation could incorporate some or all of these proposals, depending on feedback from witnesses at the hearing, as well as the public.
Investment banks and pension funds aren't waiting for that forum to make their anxiety about Lieberman's proposals known. A statement penned by six influential trade groups, including the Securities Industry and Financial Markets Association, the Financial Services Roundtable and the Investment Company Institute, warned that efforts to bar financial investors from commodities markets could "substantially harm the ability of Americans to protect themselves against inflation."
Well they would say that wouldn't they, where would they be without their profits from oil and grains now their other markets have gone tits up?
The Four Faces of Commodity Speculation: Farmer, Baker, Banker and Hedgie
Recently there was an interesting article at Spiegel Online regarding the faces of commodity speculation, as told by a farmer, baker, banker, and hedge fund manager. The use of the futures market by both the farmer and baker (hedging against falling and rising prices, respectively) are well known, as is the interest by both investment bankers and hedge funds, but the perspectives offered by the participants are interesting nonetheless.
While the article highlights only four individuals/institutions, and is somewhat anecdotal, it does offer a few observations. For instance, the following quote from the farmer is telling: "Farmers who don't have supply contracts at the moment are now calling the shots." This particular farmer, who had not yet signed a contract, is planning to sell only half of his crop to the cooperative at the end of July at the current price. He then plans to store another 50% until at least October in silos in the hope that prices will rise further. He admits that farming is becoming more speculative and that he is willing to take the risk. Quiet a turn of events and roles.
The baker on the other hand is worried about speculation and the associated risk, and is still worried that his raw material costs will be too high. As prices have increased, he is being forced to pass cost increases on to his customers, and is worried that the markets he must now operate in are too unpredictable. Since the EU has abolished intervention prices - which had helped to regulate the market he operates in, prices are now set at the CME, which he worries is being driven by speculators.
The investment banker is, not unexpectedly, trying to take advantage of the market by offering new products, such as certificates whose value rises or falls along with the price of food commodity contracts on the CME. Of interest from the investment banker is the quote of how they want to "provide each private investor with a toolkit he can use as if he were a hedge fund manager worth millions." This brings back memories of people quitting their day jobs in the late 1990s to trade stocks online at home, only to see the market correct violently. As has been pointed out by others numerous times before, when the average investor begins talking about securities and markets that he or she never talked about before (day trading tech stocks before, commodities and futures this time around), it is usually the sign that a top in the market is near.
Finally, a hedge fund manager was interviewed and pointed out that he no longer trades crude oil futures (ironically, since they are too speculative), but continues to watch them closely, since at the moment "... oil futures are the measuring stick for everything." Whether trading in oil futures or not, the fund manager needs to know how high crude oil might go given that its price has such a strong impact on the stocks he trades. Many other traders have also expressed how crude oil is affecting nearly every other asset, and how crude oil itself is becoming the new global currency. Right now that currency is in an uptrend, but volatile, and worrying market participants of a correction.
Exiting commodities - "I want to know what the new rules will be before I play in the game"
A very interesting article by one leading US investment expert:
The Commodity Futures Trading Commission announced this week that they are looking very hard at possibly closing a regulatory loophole that allowed some extremely large commodity index funds to get around position limits. For those not familiar with the concept of limits, it basically works like this. No trader or fund is allowed to own more than a specific amount of a commodity traded on the futures exchange. This limit varies from commodity to commodity and exchange to exchange. The point is to keep one group from manipulating the price of a commodity, as the Hunts did with silver in the early 80s.
The loophole is one where large investment banks can sell a "swap" for a specific commodity like corn and then hedge their position in the futures markets. There is no limit on the amount of the commodity that can be hedged. So, a fund can accumulate sizeable positions far in excess of what they could do directly by working with an investment bank. In essence, the swap is a derivative issued by a bank which acts just like a futures trade, but it is with the bank as guarantor and not an exchange. Swaps are not regulated as such. And up until now, the banks were seen as legitimate hedgers so there were no limits on what they could buy in the futures markets.
This works for very large commodity index funds which try to mirror a particular commodity index and need to be able to buy very large positions in excess of the normal limits (and there are scores of them), and for the banks that make the commissions and profits on the swaps. Remember, the fund gets a management fee, so growing the size of the fund grows their fees.
These indexes typically have about 26 commodities, with the largest allocation to oil, but almost anything that is traded has some small portion of the allocation. As I noted last week, there are some who believe this is working to drive up the price of commodities beyond the simply supply and demand principles. Whether or not you believe this to be the case, the CFTC is looking at the loophole.
The key word in the announcement yesterday was the word "classification." Right now the banks are classified as hedgers and as such have no limits. But they are not really hedging the actual physical commodity as a farmer or General Mills might do, but the hedge is their financial position.
If the CFTC decides to look through them to the funds, and they did use the word transparency in their announcement, they could decide to change the classification of the banks from hedgers to speculators. While I do no think that might make a difference in the long run, in the short run it could make commodities volatile in the extreme, and exert downward pressure up and down the price curve, depending on how they would decide to unwind the commodity index funds.
For what its worth, I advised my daughter to get out of the commodity fund she was in for the time being. When the regulators are in the room, anything could happen. And they are getting intense pressure from Congress to change the rules. My bet is that the train has left the station and it is but a matter of time until position limits are put in place for commodity funds, including commodity ETFs. Is that a good thing? I think not, but that matters not one whit. The hand writing is on he wall.
Does this mean I am not a long term commodity bull? No, I remain bullish on a host of commodities over the long term from a supply and demand perspective. It is just that you might want to consider whether to stand aside for a time while the congressional elephant is stampeding around the room. Maybe it is a non-event and someone figures out a way to unwind the positions slowly and over time. Who knows? As I said, when the regulators are under pressure to do something, I want to know what the new rules will be before I play in the game.
Shortages, dwindling stocks, hype, b*ll*cks
A great article from http://www.oilintel.com/:
Here's What's Wrong with News Cycles and Hype
New York, NY - "Oil prices rebounded on Wednesday, edging closer to $109, as concerns over a decline in gasoline stocks ahead of the U.S. driving season helped keep the market on the boil."
I just saw this on the Reuters news wire out of Singapore. It proves two things. First, the reporter knows nothing about the oil industry and is easy prey for commodity firms seeking to hype oil higher, or, the reporter just doesn't care.
Secondly, it proves there is a complete disconnection of reality from the world of hype that continues to drive all commodities higher.
Anyone who knows anything about the U.S. gasoline market knows full well there will be a draw on gasoline stocks when the EIA releases its report later this morning. It could be as high as 7 million barrels. Should that propel gasoline and crude oil higher?
No it shouldn't. Refiners are consciously trying to reduce the glut of winter grade gasoline in the system this year due to efforts by consumers to limit gasoline consumption. The EIA yesterday stated that for the first time in 17 years, the U.S. will consume less gasoline this summer in year-over-year comparisons.
In fact we believe the drop in gasoline demand will be greater than the EIA is estimating, but the EIA can always revise that figure later, as it often does.
Everything from soybeans to heating oil are hyped daily, depending on where a specific company chooses to place its bets.
So far the overnight oil markets are not buying into this specific hype, yet we won't know for sure until the market opens in New York. If the EIA reports a 5 million barrel draw in gasoline supplies, the markets will soar, despite pre-EIA expectations that have anticipated and supposedly factored in a large drawdown.
It's called the "set-up." The commission houses are quick to alert the news wires to the fact that "gasoline is tightening," which of course could not be further from the reality on the ground. So when the EIA announces a draw later this morning, the market will be poised to rally further.
Crude oil could be worth $3.00 per barrel more later today, and gasoline could be 10 cents per gallon higher before the smoke clears.
And the U.S. economy takes another battering as the commodity firms continue to make fortunes at the expense of consumers worldwide.
I never thought I would say this but it is bordering on criminal activity and mainstream reporters are unwittingly the co-conspirators.
Farmer Invites Fox, Lions and Hyenas to Discuss Why the Chickens are Dead
I'd love to take the credit for this excellent article, but sadly not a word of it is mine, still if you read nothing else today read this....
Paris, France - A closed door meeting will be adjourned in Paris on Monday morning, bringing together the entities responsible for ridiculously higher oil prices, or at least all of the entities that are benefiting from them. To even suggest anything resembling an accurate assessment of why oil prices are above $110 will emerge from this get together is naïve.
This summit of sorts was put together by the world’s chief alarmist, the International Energy Agency that keeps warning everyone about low production soaring demand and the dangerous world we live in that has become a minefield of geopolitical firestorms that threaten that ever so fine line between supply and demand. They will seek to come out of this meeting with justification for their projections, which are at least somewhat responsible for the hype in the marketplace today.
Here’s what will be accomplished. All the nonsense and rhetoric such as Iran’s nuclear ambitions, Nigerian rebels recently celebrating 40 years of disruptive behavior, Turkey’s well rehearsed and permissioned stroll into Northern Iraq, Venezuela –ExxonMobil cat fight, Venezuela’s subsequent self-defeating threats to the U.S., failing infrastructure in the U.S., refining shortages worldwide, hurricane season each year, and a host of other issues that arise each week to justify the soaring prices will be cited and further exploited. That’s the real danger of this meeting. Justification for higher prices.
Here’s how the geopolitical roster should read. Almost on a weekly basis, Nigerian rebels of one faction or another attack someone. They do it for profit. Some do it for loftier humanitarian goals. Despite the highly publicized tempest in a teapot, Nigeria manages to produce its OPEC quota each month, and in many cases, exceeds that quota. Estimates that Nigerian production has fallen by 800,000 barrels per day in 2007 are absurd. The Nigerians know it. Shell knows it. I would even say OPEC hierarchy know it.
The Iranian issue is something that’s not going away anytime soon. However, the chances are remote that Iran would try and shut down the Strait of Hormuz, regardless of what happens in the future. Shutting the Strait would hurt Iran more than anyone else. It would also isolate Iran as oil would be withheld from its customers, and Iran would discover very quickly how few allies it has. Also, “Out of Gas” signs would populate the billboards in the country since Iran imports gasoline. Turkey would never have set foot in Iraqi territory if it didn’t receive permission from the U.S. government. I haven’t seen the memo, but I would bet it went something like this. “Get in and get out, kill a few Kurdish rebels and limit collateral damage, and whatever you do, do not break anything, like pipelines, oil rigs or other infrastructure.”
The Venezuela threats and fights with Bush, the U.S. generally and the more recent spat with ExxonMobil have included veiled and not-so-veiled threats about cutting off oil supplies to the U.S. This really does not deserve explanation as the chance that Hugo Chavez would actually follow through on this threat is as big a danger as the moon crashing into the earth. If he actually did cut the U.S. off, it would lead to more supplies of oil available as President Bush would have no choice but to open the Strategic Petroleum Reserve.
OPEC members are really enjoying prices at these levels. $100 per barrel oil has been a dream for some of them for 20 years. Other than Saudi Arabia, OPEC members don’t believe, or don’t care that $100+ crude oil is self-defeating and eventually will strangle the world’s economies. Live for the moment is their motto. Extend this bonanza is their goal.
The energy market has been hijacked by a financial industry that is trying to weather other storms. Most of these institutions are trying to recover from the mortgage meltdown that they engineered and have found the commodities markets, which lack oversight, an easy target. It’s like having an ATM card to an account that is infinite. If it’s allowed to continue, oil prices will achieve the targets they have assigned, such as Goldman’s predictions of $120 or $130 per barrel. Why not $200 per barrel?
It won’t happen. It cannot happen. The U.S. economy and the rest of the world cannot withstand these prices much longer. The problem is, as the U.S. faces recession or worse, the damage done before everyone wakes up and realizes whats happened will be astronomical. It will be a big bust, much like the dot-com bubble and the housing market. Everything these financial institutions engineer eventually blow up.
This why the meeting in Paris won’t solve anything. It may even make things worse. Unless and until the U.S., in concert with the UK government, step in and make it more expensive to play in the commodities markets, and subject that industry to critical oversight, they will continue to destroy the world’s economies, milk every dollar it can, and leave it for dead. Much like the fox, lions and hyenas did to the chickens.
www.oilintel.com
Sorry Miss, I left that $190 billion I owe you on the bus
The US hedge-fund industry is reeling from its worst ever crisis because bankers -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the U.S. subprime-mortgage market -- are raising borrowing rates and demanding extra collateral for loans.
The dollar sank to the weakest ever against the euro and to a 12-year low versus the yen on speculation credit-market losses may widen after New York Federal Reserve and JPMorgan Chase & Co. stepped in to rescue Bear Stearns, and a Carlyle Group fund defaulted on $16.6 billion of debt. Two days ago, Drake Management LLC said it may shut it largest hedge fund.
Hedge-fund managers and other large speculators cut their net-long position in soybean futures by 8.8 percent to 115,796 contracts in the week ended March 11, the U.S. Commodity Futures Trading Commission said today after the close of trading. Net- long positions, or bets prices will climbed, reached a record 155,278 contracts on Dec. 11.
Funds that invest in baskets of commodities reduced net- long soybean positions 6.4 percent to 183,252 contracts on March 11. Index funds were net long a record 198,707 in the week ended Feb. 19.
"The fear now is how many other hedge funds and other investors have losses they cannot cover, and commodities are the most liquid asset to raise capital,'' said Alan Kluis, president of Northland Commodities LLC in Minneapolis.
"It's could get real ugly if these hedge funds decide to exit longs and get short,'' Kluis said. "I told clients this week that commodities are reaching an extreme high and equities may be at an extreme low.''
