Commodity Readings: Food for thought, Looming crisis?, Speculative inflation
- Investors Insight: Food for thought
. . . it takes 232 kg of corn to fill an average 50 litre car tank with ethanol - enough corn to feed a child for an entire year. It is estimated that almost 20% of total US corn production will go towards ethanol this year and the number is set to rise to 45% by 2015.
. . . the cost of ethanol from corn is now over $80 per barrel, it is about $145 from wheat and over $230 from soybeans. Other countries recognised this problem a long time ago and use crops with higher carbon hydrate content. In the Philippines they use coconut oil and the Brazilians use sugar cane. Goldman reckons that the cost of one barrel of ethanol based on sugar cane is about $35.
It is estimated that the aggregate value of commodity-linked index funds now exceeds $200 billion, a very significant number in a not very large market.
The total amount of arable land in the world is diminishing, primarily as a result of urbanisation. China alone has lost 3 million hectares of rice land to concrete in the past 10 years. In order to compensate for the reduced acreage, higher productivity levels are required. But higher yields require increased use of fertilisers which is not an option available to everyone given the price of oil.
- CBS Marketwatch: The looming commodity crisis
Historically, rising commodity prices have always attracted investor attention. This is the first commodity bull market, however, where individuals and institutions have participated, not as “speculators” but as “investors,” treating commodities as an asset class.
Unlike traditional speculators, this new participation is marked by little or no leverage, a distinctly “long-only” bias, and long holding periods. Barron’s recently cited estimates of $200 billion in participation through the swap markets, and there is probably at least another $50 billion in ETFs, mutual funds and other securities.
The inordinate and one-sided volume is breaking down the traditional relationships between the futures markets and the cash markets. Without a close correlation between the two, commodity producers and users cannot rely on the futures exchanges for price discovery and risk management. Moreover, it can become downright dangerous for them to do so; when hedgers do not see corresponding moves in the cash markets and their futures positions, they are at substantial financial risk.
India’s decision last week to suspend futures trading in potatoes, chickpeas, rubber and soybean oil didn’t come as a huge surprise; it was, nonetheless, a big disappointment.
There doesn’t seem to be a compelling reason for the government to take such a heavy-handed step for products that together account for less than 1% of the inflation index.
And even if one accepts at face value the government’s claim that it’s trying to cool speculative fever in essential items, one can’t fathom why its wrath had to fall on the humble spud: The spot price of potatoes has declined 27% this year, according to Multi Commodity Exchange of India Ltd., one of the bourses where contracts on the produce were traded.
With elections due to be held in the next 12 months, it’s very important for Indian politicians to be seen to be doing something. It doesn’t matter how ineffective or counterproductive that “something” happens to be.
All show, no substance.
