Straits Times 3 Apr 08;
Funds looking for high returns trade without concern for social impact
NEW YORK - HIGH food prices around the world? Blame - at least in part - the investors who moved their money into commodities in the past five years, looking for better returns than stocks and bonds were giving them.
From 2002, global investment funds started diving into oil, followed by metals and then grains.
The move was fuelled by falling interest rates in major economies, which make fixed-income investments less attractive, and a weak dollar, which tends to drive up the price of dollar-denominated investments like most grains.
This in turn attracted speculators, who took corn, soya bean and wheat prices to a whole new altitude.
Last month, corn futures hit a record US$5.88 (S$8.11) a bushel and soya beans US$15.86 on the Chicago Board of Trade (CBOT), the benchmark for world prices. CBOT wheat peaked at US$13.49 a bushel in February.
CBOT rough rice futures on Monday hit an all time high of US$20.50 per hundredweight, while The Financial Times in February reported that the 'more representative benchmark' of Thai rice prices had hit a 25-year high of US$475 a tonne.
Stung by high transportation costs from record oil prices, food makers have passed some of the high crop prices to consumers and some producer nations have even withheld grain exports, including rice, to guarantee domestic supply.
But anger is rising over the soaring cost of food and fuel, with protests erupting across the globe in the past six months.
From the deserts of Mauritania to steamy Mozambique on Africa's Indian Ocean coast, people have taken to the streets.
There have been 'tortilla riots' in Mexico, villagers have clashed with police officers in eastern India and hundreds of Indonesians have marched for lower food prices.
'The idea is there are a lot of new players in the commodities futures game and those new players don't necessarily have a vested interest in the market beyond the speculative interest,' said Mr Chad Hart, an Iowa State University agricultural economist.
He also said that while agricultural commodities trade on fundamentals such as harvest reports, an influx of new money has made them more volatile.
'With speculation it means it tends to move much sharper than it did,' he said.
And Mr Gary Kaltbaum, who runs a hedge fund invested in grains, said: 'Unfortunately, I think when people are trading commodities, I don't think they are even caring about social impact.
'What these people do is invest and their job is to make money. If they think something's going to go higher, they are going to trade on it. They're not going to be worried about repercussions somewhere else.'
At the same time, Atlanta-based portfolio manager Tom Fernandes said: 'Investors...have 65 per cent to 95 per cent of their assets in stocks and underperforming assets.
'They've no choice but to make an allocation to something that's at least participating. On the long side, it's commodities at the moment,' he said.
A long position is a bet that prices will go up, while a short position is a bet that they will fall.
Traders said that the weight of long investors has crowded the space between producers and consumers in grain markets, which are much too small to handle the influx.
Total trading volume for a day in CBOT corn, soya beans and wheat is less than 1 per cent of the US$3 trillion traded each day on the global foreign exchange market.
And the combined value of the US corn, soya bean and wheat crop last year was just US$92.51 billion.
By comparison, outstanding US Treasury bonds total about US$4.6 trillion, and the market capitalisation of US stock markets is about US$16 trillion.
'The US imported US$36 billion worth of crude oil last month. If oil exporters then used this money to buy our wheat, they would have enough money to buy the entire US crop,' said Mr Peter Kordell, president of a Minneapolis commodity futures brokerage.
But laying all the blame for current commodity prices on hedge funds and speculators may not be fair.
'The fact that these grains markets are moving higher is a bonus to these funds but they would be equally content if these markets were in a downward spiral as they could make money shorting them,' said Mr Gavin McGuire, an analyst at Iowa Grain, a Chicago firm specialising in US grains futures.
Mr Kaltbaum, the Florida hedge fund manager, agreed: 'These things can cut both ways and there'll be a time when they go down also.
'When the fast money crowd sees things moving, they want to jump on.
'Until the bubble kind of bursts.'
REUTERS
Factors causing price spikes
Straits Times 3 Apr 08;
EXPERTS pinpoint a host of reasons for the food crisis, besides speculation and hoarding:
# BOOM IN DEMAND
Rising affluence in India and China has increased demand.
'China's population is proportionately much larger than the countries that industrialised in earlier periods and is almost double that of the current G-7 nations combined,' the Australian central bank said last year.
The Chinese, whose rise began in earnest in 2001, ate just 20kg of meat per capita in 1985. They now eat 50kg a year. Each kilogram of beef takes about 7kg of grain to produce, which means land that could be used to grow food for humans is being diverted to growing animal feed.
# BIOFUEL TROUBLE
As the West seeks to tackle the risk of global warming, a race towards greener fuels is compounding the world's food woes. The US has a mandate to produce nine billion gallons of ethanol, made from corn, this year and 10 billion gallons in 2009.
'Turning food into fuel for cars is a major mistake on many fronts,' said Ms Janet Larsen, director of research at the Earth Policy Institute. It has led to higher food prices in the US and in developing countries 'where it's escalated as far as people rioting in the streets', she said.
Similarly, palm oil is at record prices because of demand to use it for biofuel, hurting low-income families in Indonesia and Malaysia, where it is a staple.
# UNFAVOURABLE WEATHER
Erratic weather, perhaps due to climate change in grain-producing countries has played havoc with crops.
A severe 10-year drought in major wheat exporter Australia lit a fire under the wheat market.
Harvests have been affected by drought and heatwaves in South Asia, Europe, China, Sudan, Mozambique and Uruguay, the UN's World Food Programme said in November last year.
# RISING OIL PRICES
Record oil prices have boosted the cost of fertiliser and freight for bulk commodities. Stung by the high transportation costs, food makers have passed some of the high crop prices to consumers.
The oil price spike has also turned up the pressure for countries to switch to biofuels, which the FAO says will drive up the cost of corn, sugar and soya beans.
# CURB ON EXPORTS
A number of governments, including Egypt, Argentina, Kazakhstan, Vietnam, Thailand, India and China, have imposed restrictions to limit grain exports and keep more of their food at home and guarantee domestic supply.
The Vietnam Food Association has asked its members to stop signing new rice export contracts. Malaysia plans to import rice from other South-east Asian nations to build reserves.
The Philippines is buying the grain from an emergency regional stockpile and taking additional supplies from the US.
# NOT ENOUGH INVESTMENT
The farm sector has failed to invest enough in production over the past five years. With the US credit squeeze getting worse by the day, securing borrowings has become harder for farmers in the world's biggest grain exporter.
Also, grain elevators - companies that buy from farmers and remarket to processors - are seeing losses because they have committed to provide grains to processors at much lower prices.
# DISEASED CROPS
Vietnam's farm sector faces the prospect of a return of the deadly crop disease which affected its crop yield badly last year. A viral disease called tungro and infestations of the brown plant-hopper insect in its fields have also led to global supplies being drained.
Scientists are also worried about the spread of a wheat-killing fungus, known as Ug99, from Africa to Pakistan and India.
The spread of the deadly virus, against which an effective fungicide does not exist, threatens the vital Asian Bread Basket, including the Punjab region.
India and Pakistan are home to more than 50 million small-scale wheat farmers, who are more vulnerable to disease than bigger producers in developed countries, who can afford to purchase expensive fungicides to protect their crops.
REUTERS, BLOOMBERG, ASSOCIATED PRESS
