Commodities continue rally amid edgy equity market run

Commodities continue rally amid edgy equity market run
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First Published: Sun, Jan 27 2008. 10 58 PM IST
Updated: Sun, Jan 27 2008. 10 58 PM IST
If your heart has been racing for the past few days, watching the stock market drop, maybe what you need to do is look in a less glamorous direction: commodities. There are, commodity analysts tell you, handsome gains to be had in wheat, soyabean, vegetable oils, maize and coffee. And if you can afford it, gold.
While global stock markets—including India’s—melt down, many commodities are expected to continue their rallies, which even now remain mostly unaffected by the see-sawing in equities, said analysts. For investors, many of whom have cashed out billions of dollars from the equities market, commodities markets might become an attractive destination to park their money while waiting for the stock market to cool down.
Already, some of that is happening. As the stock markets fell, commodities markets were seeing a marked increase in their trades.
“Year on year, we see more money streaming into the organized commodities markets,” said a top official at the Multi Commodity Exchange of India Ltd, the larger of India’s two biggest commodity bourses. The exchange, part owned by Fidelity International Ltd, saw trade go up by a fifth during the last two weeks of 2007, to a record Rs99,860 crore, from the year-ago period.
The National Commodity and Derivatives Exchange Ltd or NCDEX, a rival commodities bourse, saw more than Rs21,800 crore in trade in the same weeks, the last period for which data is available. NCDEX spokesperson Suryakant Mishra said the trading also saw an increase because of relaxation of margins regulation and seasonal variations.
NCDEX, part-owned by Goldman Sachs Group Inc., was mirroring a nationwide trend. In the last two weeks of December, Rs1.28 trillion worth of commodities were traded on India’s 23 commodity exchanges, an increase of almost 21% from the comparable period a year ago.
Those numbers, of course, are dwarfed by the volumes traded on, say, the Bombay Stock Exchange. But what investors ought to find attractive about the commodities market right now, said analysts, is their long-term predictability.
“Day to day, I agree that commodities can be very volatile,” said Dharmesh Bhatia, an analyst at Mumbai-based Kotak Commodities Services. But, he said, because the prices are much more closely aligned to basic demand and supply positions, most investors don’t need to be too sophisticated to make long-term bets that will likely pay off well.
Take, for instance, wheat. Both in India, and in overseas commodities markets, the grain has been one of the top performers last year. It will likely be this year too, for reasons that are relatively obvious: US farmers are planting less wheat, replacing acreage with maize, which is on a rally because of focus on ethanol and other biofuels. At the same time, countries such as India, China and Pakistan, traditionally among the top importers of wheat, are finding domestic crops inadequate, forcing India, for the first time in almost six years, to import wheat.
The result? Wheat spent all of last year on a global rally—doubling on many exchanges—and is likely to continue its bull run this year. Futures options were up by almost 60%, and as a cold winter destroyed crops in the US, and just in the last week, spring wheat, which is only traded in Minneapolis, gained 12%.
“A situation of mismatch between demand and supply is emerging in wheat,” said Sharad Pawar, India’s agriculture minister, on Wednesday, according to a transcript of his comments on a government website. “While the average weighted price of wheat was $205 (Rs8,077) per tonne last year, this year wheat was available only at an average price of $375 per tonne.”
India’s government-run State Trading Corp., which imports wheat for the country, is among the top purchasers globally, and given Pawar’s remarks, is likely to continue imports through 2008 because of local crop conditions, which stayed static, and will help keep global wheat prices high. In India, wheat prices have stayed relatively low due to government policies, and as the shortness of demand overtakes the reach of those policies, wheat is expected to soar this year, said an analyst at Chicago-based PTI Securities, who asked not to be named because he does not specialize in Indian commodities.
Or take soya beans, in which India is ranked among the world’s top four producers and exporters. It makes up the primary ingredient in soya meal, which meat producers use to feed chickens and other animals meant for human consumption. Last year, soya bean production remained more or less steady in India, but global tightness in supply—with increased demand in China, Korea and Indonesia—pushed prices up by 71%. Indian exporters, who also benefited from a huge spike in shipping rates, made a killing: exporting $11 billion worth of soya bean in 2007, more than double that in 2006. “It was easily the best year for us,” said Rajesh Agrawal, chairman of Premier Industries (India) Ltd and a former president of The Soybean Processors Association of India.
And as global prices for soya bean soared, the prices in Indore, the primary centre of soya bean trade, also soared, pushing prices per quintal up to Rs1,950, a hike of 41%.
Of course, as soya bean prices soared, farmers around the world paid attention. US based-Informa Economics, an agricultural data company, said American farmers will increase soya bean acreage by 8.4%, and reduce maize acreage by 3.8%.
Maize prices peaked earlier last year, and are not expected to pass $5 a bushel (equivalent to a little over 35 litres by volume) on the international market, which is close to a historic high, apart from years with exceptional droughts.
The biggest threat to investors in Indian commodities markets is that since the entire market is dominated by retail investors, it is not impossible that prices rise and fall because of cartels, said an analyst who declined to be named because of the controversial nature of the subject.
The best protection against that is for investors to stick to Indian commodities that are also traded internationally, and have global exposure—their prices tend to follow each other, but with a time lag, and with corrections for the rupee to dollar appreciations or declines.
So, for instance, coffee should make for a more stable—and transparent—investment than, say, gur (also known as jaggery), because India exports 80% of its coffee produce, while most of the jaggery is locally consumed. Sugar, which is expected to decline this year, is doing so because of a conflux of international slackness in demand, and increased sugar production within India.
“Generally, I have found that (internationally traded) commodities have some logic to their fluctuations—slow demand, or weather delays, or seasonal,” said Rajneshbhai Patel, a commodities trader in Ahmedabad, who puts his trades through a broker in Mumbai. “But when maize goes up or goes down, I am usually taken by surprise.”
Patel, 48, said he had been trading commodities since he was 21, although he has a day job as a shopkeeper in a new mall in Ahmedabad. He was initially hesitant to speak about his portfolio, saying he didn’t want to brag about his good luck while others were suffering on the stock market, but estimated his gains last year to be in the range of 60-70%. He traded in soya bean, coffee, vegetable oils, chana or chickpea, pepper and one more commodity that he refused to name, calling it his secret weapon.
And then, there is gold.
Internationally, 2007 was gold’s biggest boom year—its longest running rally since the end of World War II. Gold breached the $500-an-ounce price barrier in the last quarter of 2005 for the first time since 1987, surged to a high of $720 in May 2006, and closed 2006 for an average of $637, according to Bloomberg data. They’ve traded above $910 an ounce in the past few weeks, a giddy height for a metal many thought had gone out of fashion as an investment choice.
But because India’s rupee has appreciated so much against the dollar, and because gold has not been available for commodities traders until recently in Indian markets, it hasn’t reach those stratospheric heights here yet. But a poll of six analysts who cover bullion for the Indian commodities market, contacted by Mint, showed an average target price of $950 an ounce for the metal, which four said they expect to reach by mid-year. “I can see more investments in metals and bullion,” said Bhatia, the Kotak analyst. “But especially in gold. It has great potential for the year.”
Looking at commodities prices globally, which helps to iron out some of the wild fluctuations of a local market, investors have ridden solidly on a six-year boom, which was especially intense in the last three years. But because commodities trading is often considered less glamorous than stocks, it hasn’t yet attracted the huge volumes of money that equities markets have seen. Global commodities investments rose by a third in 2007, but only to about $175 billion, according to a January report by Barclay’s Capital, which is predicting another strong increase in investment for 2008. As a result, the UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 commodities, hit a historic high on 9 January, reflecting a 22% increase year-on-year, but has weakened since because of fears that a US recession might dampen demand for fuel, metals and some food supplies.
As global stock markets see-saw, the fact that commodities markets are indeed decoupled from equities markets ought to be an increasingly attractive investment for those with long-term outlooks.
“The typical participant in commodities is different from that in securities (equities),” said NCDEX’s chief executive Ravi Kumar, in an email through his spokesman. “As there is little relationship between stocks and commodity prices, they are complements, rather than substitutes and hence a great portfolio diversifier,” he added.
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First Published: Sun, Jan 27 2008. 10 58 PM IST