Monday, July 26, 2010

"Is agriculture the next big investment thing?" (DBA; FUD; MOO; RJA)

From the Guardian:
As the world's population expands, China switches from rice to meat, and biofuel growth looks set to rocket, City experts think agriculture is the best place to make money in the next decade

Hedge funds, with billions of pounds in assets, are recklessly gambling on food prices, with speculators driving massive price volatility that threatens the most vulnerable people on the planet.
That's the view of the World Development Movement (WDM), which issued a damning report this week arguing for a regulatory clampdown on hedge funds and banks in the commodities market.

It launched a campaign which saw the Financial Services Authority's switchboard jammed with calls from protestors demanding curbs on speculation. But over at Britain's oldest food market, Borough Market in London, fund managers at one of the biggest investment groups in the world, BlackRock, were telling a rather different story.
It was rolling out its World Agriculture fund for small investors who, it says, can profit from the long-term increase in food prices as rising affluence in China, India and Brazil dramatically changes dietary habits.
BlackRock is not alone in seeing agriculture as a potential new goldmine. Last year, Baring launched a global agriculture fund which is already more than £100m in size and has given its earliest investors a 30% gain. Both groups see their funds as appropriate investments for British pensions and Isas over the long term.
Should you be tempted to? Or, by doing so, are you simply exacerbating speculation in food that has seen products such as cocoa spiral by 150% in the last 18 months? And are the claims of the fund managers robust? Is food really that likely to be a good investment over the next 10–20 years?

WDM campaigner Kate Blagojevic aims her fury not so much at longer-term investors, but at short-term speculators who, WDM claims, have made commodity markets more volatile than ever. "Population growth, increased demand and climate change are all contributing to a long-term gradual rise in the price of food.
"But we feel speculators are taking these trends and exacerbating them, creating such price instability that it's having a devastating impact on farmers. Let's say you are a cocoa farmer. Prices are at a 30-year high. How much do you grow next year, when the price might fall as suddenly?"

But haven't commodity prices always swung violently? The WDM report, The Great Hunger Lottery, argues that during the 1990s and early 2000s, aggressive lobbying by bankers led to weaker regulations covering speculation in agricultural contracts. "Over the past decade, the world's most powerful financial institutions have developed ever more elaborate ways to package, re-package and trade a range of financial contracts known as derivatives ... destabilising and driving up food prices."

Indeed, even small investors can now play the commodity markets through "Exchange Traded Funds" (ETFs), synthetic indices which match price movements in things such as wheat, corn and soybeans, and where you can start speculating with as little as a few pounds.

But BlackRock and Baring both deny they are at the speculative end of the market. Firstly, their agricultural funds don't buy underlying commodities, but trade in the shares of companies involved in agriculture....MORE

Charts via ETFTrends:
  • PowerShares DB Agriculture (NYSEArca: DBA): down 0.6% year-to-date.
  • Market Vectors Agribusiness ETF (NYSEArca: MOO)
  • E-Tracs UBS Bloomberg CMCI Food ETN (NYSEArca: FUD)

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