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 they were getting from stocks and bonds.
Global investment funds saw the potential for profits in commodities outstripping those from the stock market, and from 2002 started diving into oil, followed by metals and then grains. This move was fuelled by falling interest rates in major economies, which makes fixed-income investments less attractive, and a weak dollar, which tends to drive up the price of dollar-denominated investments such as most grains.
This attracted investors with little or no connection to the grain market, often labelled as speculators, who took corn, soya bean and wheat prices to a whole new altitude.
In March, corn futures hit a record $5.88 (about Rs235) a bushel and soya beans$15.86-3/4 on the Chicago Board of Trade, the benchmark for world prices. CBOT wheat peaked at $13.49-3/4 a bushel in February.
Stung by high transportation costs from record oil prices, food makers have passed some of the high crop prices to consumers, leading to protests in many countries. Some nations have withheld grain exports to guarantee domestic supply.
Investors say high prices are supported by fundamental supply-and-demand factors such as a higher-protein diet in emerging economies such as China, demand for biofuels made from corn, soya beans and palm oil, and drought in some important grain exporting nations. But investors bear at least some of the blame, economists say.
“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 Chad Hart, an agricultural economist with the Center for Agricultural and Rural Development at Iowa State University.
Hart said though agricultural commodities trade on fundamentals such as harvest reports, they have become more volatile due to the influx of new money.
“Unfortunately, I think when people are trading commodities, I don’t think they are even caring about social impact,” said Gary Kaltbaum, who runs a hedge fund, Kaltbaum and Associates of Orlando, Florida, that is invested in grains.
“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,” Kaltbaum said of investors like himself.
As recession talk swirls in the US, some say the outlook for stocks and bonds may not be as bright as for commodities. “Investors are likely to see negative US GDP (gross domestic product) from here and they have 65-95% of their assets in stocks and underperforming assets,” said Tom Fernandes, a portfolio manager at Greenhaven LLC, an Atlanta asset manager that invests in food and biofuel crops.
“They’ve no choice but 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 that prices will fall.
Traders said 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% of the $3 trillion traded each day on the global foreign exchange market.
And the combined value of the US corn, soya bean and wheat crop for last year was just $92.51 billion. By comparison, outstanding US treasury bonds total about $4.6 trillion, and the market capitalization of US stock markets is about $16 trillion.
“The US imported $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 Peter Kordell, president at Slipka Financial Partners, a commodity futures brokerage.
Investors say the farm sector is partly to blame for failing 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 than today’s.
Unfavourable weather that has played havoc with crops is another problem. Adding to the mix is the race to make biofuels. The US has a mandate to produce 9 billion gallons of ethanol, made from corn, this year and 10 billion gallons in 2009. Given the varied factors, blaming hedge funds and other speculators for current commodity prices 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 Gavin McGuire, an analyst at Iowa Grain, a firm specializing in trading grains futures.
Kaltbaum agrees. “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,” he said. “Until the bubble kind of bursts.”
K.T. Arasu and Christine Stebbins in Chicago and Christopher Doering, Missy Ryan and Russell Blinch in Washington contributed to this story.