New turnaround in soft commodity investing

Last Updated : 20 June 2011 at 14:50 IST

By David Campbell
Investing in soft commodities is a fundamentally different proposition from other alternative asset classes, let alone traditional securities. Sharp gains in the price of Zinc are rarely, if ever, the cause of full-page advertising spreads and billboards calling for unspecified intervention to curb speculation.

Charities and policy-makers, from Oxfam and Christian Aid to the World Bank, have all voiced their concern about resurgent food prices in recent weeks. Their alarm has very real cause; large swathes of the world’s population routinely spend around 70% of household income on their food budget, and few governments are willing to tolerate a repeat of the global food riots of 2008.

The need to keep oil revenues high to pay for subsidised staples was the major cause of the fallout at last week’s Opec meeting, as a series of emerging states defied the dovish stance of Saudi Arabia.

Cereal prices have gained 69% over the past year and global Wheat prices have more than doubled. But there are reasons to believe that much of the impetus behind these gains is already fading.

Robert Farago, head of asset allocation at Schroders, said the marginal sensitivity to pricing and demand contained a time lag, but tended to correct on the supply side sooner rather than later.

‘The drivers for soft commodity prices are cyclical rather than structural,’ he said. ‘There has been a lack of investment in agricultural production, leading to bottlenecks and spikes in food prices.

‘However, because there isn’t a shortage of agricultural land, higher prices will eventually Lead to higher production, which in turn will drive prices down again. We do expect soft commodity prices to rise in the short term, but they are volatile and some prices are frothy. There are safer bets out there.’

The weight of capital suggests any correction could also be sharp. Relatively few are betting on any downside in grain prices, with short activity almost non-existent, according to Data Explorers.

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Commodity Trends: Chana rises on festive demand pepper declines

Last Updated : 03 July 2011 at 12:30 IST

Commodity Online Agri Service

India Pepper futures continued to move in south-ward direction on weak export demand and limited trading activities in the domestic market. Chana prices gained this week on festival demand which resulted in active buying by millers and stockiest. Turmeric prices weakened while Wheat prices gained on physical market demand.

Pepper

Indiapepper futures fell this week due to absence of export demand. The prices continued to head south on limited activities. There were no sellers in the physical market.

In global markets, reports fromVietnamsaid its pepper market firmed up today on good buying support fromChina. Price indications were that 500gl at $5,550 a tonne fob HCMC and 550gl at $5,900 a tonne and white double washed at $8,150 a tonne. Prices for Lampong ASTA quality indicated today at $ 6,600-6,650 FOB levels.

AtKochi, pepper was trading 107 rupees higher at 27,400 rupees per 100 kg. The most active July futures contract at National Commodity and Derivatives Exchange (NCDEX) closed lower by 0.37 % at Rs.271297 per quintal after hitting a low of 26825. August contract opened this week at Rs.27700 per 100 Kg and closed lower by 0.30% at Rs.27616 per quintal.

During April-March 2010-11, a total quantity of 18,850 MT of pepper valued Rs.38318.50 Lakhs ($84.13 million) was exported as against 19,750 MT valued Rs.31392.50 lakhs of last year. The unit value of pepper has increased from Rs.158.95 per kg in 2009-10 to Rs.203.28 per kg during 2010-11.

According to IPC’s projection, pepper output inIndiais estimated near 48000 tons compared with 50,000 in the previous year. Unconfirmed sources also expect the production to be lesser than the earlier projections. While the domestic consumption is estimated 2011 in 45000MT as against 44000 MT in 2010

The Global Production to be 2.03% lower in 2011. Consumption to grow at 5% in 2011 as against 3.46% in 2011 According to department of Commerce Vietnam Exports was had reached 9919MT down by 28 percentage in volume.

(Is pepper set for continued weakness in spot markets?)

Chana

Chana futures inIndiarose this week on festive demand from local millers. Disruption in vegetable supply during the rainy season boosts demand for pulses like chana. Consumption usually increases during festive season starting in August.

InDelhi, a key spot market, chana rose 57 rupees to 2,750 rupees per 100 kg. At NCDEX July delivery contract opened at Rs 2745 per 10 MT and closed 3.35% higher at Rs 2837 whereas Chana August contract opened at Rs.2818 and ended at Rs.2917, up by 3.51%.

Kharif Pulses sowing has started inMaharashtraand AP. Indian Metrological department (IMD) has initially forecasted a normal monsoon for 2011 season. However, on 21st June, 2011, IMD has released a second Long Range Forecast wherein it has predicted monsoon to be below normal i.e only 95% of the Long Period Average.

Also, in the peak growing period, of July and August, IMD has predicted monsoon to be 93% of LPA. In Central India andSouth Peninsula(Kharif Pulses producing regions) monsoon are expected to be 95% of the LPA.

Production of Chana as well as Pulses in the current crop year is estimated higher at 7.38 million tonnes and 17.29 million tonnes respectively. Planning Commission has estimated that the demand for pulses in the country during the period 2011-12 is 19.11 million tonne.

(Will Chana prices correct on profit booking?)

Soybean complex

India's oilseeds and soyoil futures gained tracking global cues that outweighed concerns over soybean sowing in second biggest producing Maharashtra state. In global markets also soybean rose on speculation that reduced Midwest plantings will trim supplies from theU.S.

In theIndorespot market, soyoil fell by 1.7 rupees to 636.35 rupees per 10 kg, while soybean fell by 14 rupees to 2,278 rupees per 100 kg. At Sri Ganganagar in Rajasthan, rapeseed dropped 23 rupees to 2,775 rupees per 100 kg.

In futures market, NCDEX July soybean prices rose in the weekend to finish 0.84% higher at Rs 2320.50, while August Soybean prices rose to Rs.2338 higher by 1.60%. July soy oil also recovered in the weekend to end 0.84% higher at 641.35 per 10 MT, August contract rose from Rs 638 to Rs 641.75 per 10 MT on week.

At CBOT, on Friday Soybean futures for July delivery rose 16 cents, or 1.2 percent, to $13.2225 a bushel. The contract rose 0.2 percent this week.

The USDA’s weekly export inspections came in at 8.73 million bushels which was slightly higher than expected and compares with 12.17 million bushels necessary each week to reach the USDA projection for the old crop season. Talk that drought conditions in the southern plains could expand east into southern soybean growing areas also provided support to soybean prices. However, pick up in soybean sowing in Madhya Pradesh after receiving a better rain in major growing regions may cap sharp gains.

Government has raised the Minimum Support price (MSP) of Soybean to Rs.1,690/qtl from Rs.1,440/qtl. This will induce farmers to go for improved sowing of the soybean.

(How far will weak monsoon affect soybean production?)

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Barclays: Brazil s infrastructure a source of additional commodity demand

Last Updated : 01 July 2011 at 21:00 IST

Commodity Online

Brazilian commodities demand could benefit greatly from the planned acceleration in infrastructure investment in the country. The bulk of the Brazil’s infrastructure systems dates back to the 1960s and ‘70s and is in need of major upgrades to sustain continued strong economic growth.

Lagging infrastructure has already begun to have a noticeable effect on the Brazilian economy and if left unaddressed could constrain the country’s future economic expansion. Transport and logistics, in particular, are a major area of weakness and source of cost in getting goods to markets. For farmers in the key soy producing region of Mato Grosso, in the center-west of Brazil, moving their produce to the South East ports of Santos and Paranaguá, account for roughly 30% of the total production cost; it also represents a multiple of what it costs rival farmers in the US to transport their products to ports.

The country’s railway system is inefficient and small, and the bulk of agriculture products are moved over long distances on the country’s beleaguered highway system. Only 14% of the 1.7mn kilometers of federal, state and municipal highway roads are paved. By comparison, roughly 50% of Chinese and Indian roads and 80% of Russia’s are paved.

While various projects have been proposed to expand the railway system and increase utilization of the country’s ample waterways, very little has been achieved so far. As the agricultural frontier continues to expand in new areas, poor logistics remain a key challenge and a potential constraint to the pace of expansion. Access to ports is another major bottleneck. Heavy traffic through the congested route leading to the major export terminal of Santos often causes jams and delays, as the vast majority of goods reach the port via road. Lack of storage warehouses at the port site also adds to costs and the journey’s time.

Indeed, the current transportation mix – heavily skewed towards road transportation – is largely inadequate for a country as vast as Brazil. The country’s railway system has not changed since the early 1970s, and it is half the size of that of China and Canada, countries characterized by similar surface areas.

Brazil has numerous ports and private terminals, most of which, however, require upgrades. While some improvements have been made in recent years – including privatization of a number of terminals – they have proved insufficient to cope with soaring traffic. Volumes at ports have increased by more than 50% over the course of the past decade, and projected strong export growth for a number of commodities – particularly the soy complex, oil and iron ore, which combined account for 65% of total trade volumes – would further strain the country’s port system, unless expansions are quickly implemented.

The major ports are located in the country’s East/South East, with Santos (Sao Paulo), Itaguai (Rio de Janeiro), and Paranaguá (Paraná) accounting for more than 60% of total trade in 2009. The bulk of agriculture trade currently takes place from three ports in the South/South East: Santos (SP), Paranaguá (PA) and Rio Grande (Rio Grande do Sul). A fourth export hub for agricultural products at Sao-Luis (in Maranhao State) in the North should open up next year as Vale carries out major work at the port and improves railroad access to the region. Sao Luis is already a major export outlet for iron ore, handling more than 30% of the country’s total Iron Ore exports and is on track to expand further in 2012.

Other major export hubs for Vale are the Tubarao Terminal in Vitoria (Espirito Santos State) and Itaguai (in the South of the State of Rio de Janeiro). Oil exports are handled through ports located along the Eastern Coast, spanning the states of Sao Paulo, Rio de Janeiro, Espirito Santo, and Bahia, where the bulk of Brazilian oil is produced.

The poor state of Brazil’s infrastructure is well documented. In its 2010-11 global competitiveness report the World Economic Forum ranks Brazil 62nd out of 139 countries for the quality of its infrastructure. The report identifies the most problematic areas in the quality of ports (123rd), roads (105th), air transport infrastructure (93rd), and rail road infrastructure (87th) and comments as follows: “This assessment reflects the appalling state of the transport infrastructure in the country, its underdeveloped railroads, the unexploited potential of its 48000 km of navigable waterways, its congested ports and airports.” In a similar vein, in a survey published in the same report, poor infrastructure is highlighted as the third most problematic factor for doing business in Brazil. By comparison, such factor ranks 7th for China and 10th for Russia.

The importance of infrastructure investment to fuel sustainable growth has been recognized by the Brazilian Government in recent years and upgrading infrastructure has formed a key pillar of the Lula administration’s ambitious Growth Acceleration Program (PAC) launched in 2007. PAC 1, which earmarked a total of R$504 bn in investment in the 2007-10 timeframe, has then been followed by PAC 2 in 2010, calling for R$959bn to be spent between 2011 and 2014. The financing is expected to come from a combination of public and private money.

Results so far have fallen short of expectations and a large portion of the financing that has actually taken place has been directed at housing rather than the improvement in physical infrastructure. Notwithstanding this, the PAC represents a step in the direction of improving the infrastructure and highlights the government’s increased sense of urgency in tackling the country’s infrastructure deficiencies. Overall, therefore, we see the potential for infrastructure investment to accelerate over the next few years.

The run-up to the 2014 World Cup and 2016 Olympic Games, alongside the development of the pre-salt oil industry, should also help attract incremental flows. We expect investments as percent of GDP to rise from the current 18% to 22% by the middle of the decade.

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