Tuesday, March 29, 2011

Odey Asset Management's Crispin Odey on Agricultural Commodities & Farming

From Market Folly:
The founder of UK based hedge fund firm Odey Asset Management, Crispin Odey, is out with his latest market commentary and investment outlook. Penned on the 28th of February, Odey writes on the slightly tangential, yet increasingly talked about topic of farming and agricultural commodities.

We've detailed how legendary investor Jim Rogers is bullish on agriculture and has also bought farmland. Also, the now famous subprime short-seller Michael Burry also bought farmland. While these well-known investors focus on arable land, Odey's recent commentary expresses concern regarding agricultural commodities and supply/demand imbalances.

Here's Crispin Odey's outlook:
"This is always the time of year when my farming friends ring me up every day to ask 'should they be selling forward their harvest?' The truth is that at this time of year they have little to do other than worry about it, and because they worry they are always early sellers. Like everyone, they are risk averse. By now with the harvest less than six months away, they are probably 65% pre-sold and yet they watch the price rising and falling and of course on weak days they kick themselves for not selling more.

In my hedge fund we are also forced to get involved. We are shareholders in a station in Australia which this year has grown over 23,000 acres of cotton, and plans to grow 25,000 acres next year. Cotton has nearly tripled in price in eighteen months and it is no surprise to find that we sold this year's harvest, which is just about to start, at half the current prices. Why? Because we had sold 2/3 of our crop forward by November of last year. We were the lucky ones because our neighbours further down the Darling River lost most of their crop, thanks to the flooding, and the rise in the price from $100 to $220 per bushel was nothing more than them covering that shortfall. Like many people, they hated taking a loss and the same conservatism that had led them to sell forward, led them to sit and hope that the price would come down before delivery in April. Many of these farmers face bankruptcy, in the best year for cotton in 30 years. 
This year the farm will make a 30% return on our investment made nearly four years ago. If prices hold into next year we would almost earn what we paid for the farm, in one year. In other words prices are very unlikely to hold!...MORE
See also:
Here Comes Another Bubble: Farmland (FAM)
(lots o'links)