A short commodities outlook

One of the most tragic facts of human life is that you can only do a tiny fraction of what you would like to do, or what you feel you should do, for something as simple as time constraint - unless you are completely apathic, that is.

 

At the office, for example, I routinely find myself having to make a tough choice between work, PC football, ringing up family & friends, or simply enjoying a nap. Usually, my workload tells me I should strictly go for option A, and this clearly comes at the expense of B, C and D, which is tragic.

 

Or take today’s train ride from Frankfurt to Munich: I could choose between running through my presentation on South African retail again; reading the food commodities supplement from the Financial Times of 25 November (12 pages); or going through the fascinating annual globalisation atlas from Le Monde Diplomatique (216 pages). No chance at all to get all three things done.

 

So the commodity issue wins, with my last presentation run shifted to a post-dinner espresso tonight. And these are the highlights from the FT pages:

 

In the opening piece (”Volatility gives food for thought”), Javier Blas describes how, from an investor perspective, commodities have developed from “an exotic corner of the markets” as recently as ten years ago, into an asset class that has “matured considerably”, successively attracting hedge funds, institutional investors such as pension funds, asset managers, private bankers and, finally “as so often in market booms”, retail investors. The article then describes how the sharp price fall that followed the spectacular boom of 2003-2008 left market observers divided into two camps: “pessimists”, who believe that commodity prices are to stay low for a long period of time (e.g. the World Bank); and “optimists” (including a number of Wall Street analysts and natural resources company executives) who believe that last year’s market collapse was only a temporary interruption of a super-cycle. Without getting lost in detail, Blas states that the question will have to remain open until further notice, even though “so far, the course of events appears to support the Wall Street banks and natural resources companies’ view”.

 

This morning's top candidates

This morning's top candidates

“And why did Boris put the pessimists and optimists in inverted commas above?”, you may wonder. That’s because an investor’s optimistic scenario can easily be a nightmare scenario for poor urban dwellers in emerging markets who live at the mercy of food price developments, having no farmland of their own. Whether or not investors start another run on the commodity markets will clearly also impact the poor people’s lives.

 

A few pages later, the same author has a closer look at food commodities (”Investors in rush to feed the world”), pointing to the fact that many underlying factors that drove food prices in the past continue to exist despite the recent recession. Apologies for repeating myself here, but to sum it all up these factors mainly include a fast-growing world population; urbanisation that eats into farmland; a rising middle class in emerging markets eating more and better foods; a series of supply shocks partly due to climatic irregularities; the continued advance of bio fuels; and increasingly scarce clean water resources.

 

One analyst quoted in the article sums it up by saying that “if you are bullish on population growth, you have to be bullish on agriculture”. Blas then describes how investors “have been cautious about pouring money into food commodities openly, for fear of being accused of profiting from increasing world hunger”. And he states how recently, to avoid the price volatility “short-term problem of investing in agricultural commodities”, investors have been “moving from futures into actual farming, buying farmland in developing countries such as Ukraine, Brazil or Uruguay”. Finally, he adds: “The investors, bankers say, hope not only to cash in on rising commodities prices, but also on the appreciation of land values.” Best of luck to the farmers employed there.

 

There are many more interesting articles in the supplement. If you are interested in parts of the issue and can’t get hold of it because it’s almost a week old, feel free to let me know and I’ll happily help out.

 

Have a good week.

Boris

 

 

 

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