A Rising Tide for Agricultural Commodities

25-Feb-2011

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







ByAndrea Tse, TheStreet,

NEW YORK (TheStreet) — Agricultural commodity prices are likely to be on the rise for quite some time, driven by growing demand from emerging global markets, political unrest and an increasingly unpredictable growing environment.

Sugar on the whole is on the uptrend. On Feb. 2, sugar burst through a 30-year high as a storm slammed into Australia — a big sugar exporter. Sugar futures for March delivery flew past 36 cents a pound and is expected to continue trending higher.

One the one hand, supply-constraining political, economic and climate-related developments will continue to keep prices strong. On the other, fundamental demand for food continues to increase as populations around the world grow bigger and richer — and not just in the most populous, developing nation of China.

“You’ve seen caloric intake overall rise in most parts of the world over the last ten, 20 years, and that’s a trend that’s going to continue,” said Jeffrey Christian, managing director and founder of CPM Group, a commodities research and investment firm. “Populations are growing, but financially — generally speaking — they’re better too, so people can afford more food.” Currently India is the biggest consumer of sugar.

Food prices are also being driven by speculators. Coffee is one instance of an agriculture commodity that’s been receiving a big inflow of speculative money. “Right now they have a relatively large long position and that could help keep the price up for a while,” Christian said.

Looking at grains, Deutsche Bank recently came out with a report titled, “Running Out of Corn,” in which analyst Michael Lewis said that he views the physical fundamentals of corn as “extremely tight” — driven by rising Chinese corn shortages and increasing appetite for U.S. corn from the U.S. ethanol industry.

Overall, the analyst finds that rallies in corn and coffee tend to be shorter in duration than wheat, cocoa, sugar and cotton — though rallies are typically more powerful in magnitude for sugar and coffee than cotton and corn.

Here’s a look at the current views and projections of prices, and supply and demand developments for corn, wheat, sugar, cocoa, orange juice and coffee — and how recent price increases have impacted the major food companies.

Wheat

Wheat has been the best-performing component on the Deutsche Bank Liquid Commodity Index (DBLCI) in 2011, rising 14.9%, Lewis of Deutsche Bank wrote in a weekly commodities report.

The analyst believes wheat returns have been driven higher on worries that freezing weather in the U.S. and droughts in northern China could damage crop yields. “We believe price spikes in this complex are a growing threat particularly in an environment where governments employ export bans to ensure food security,” he said.

In a previous report, Lewis had also noted that droughts that devastated crop production in the former Soviet Union and the subsequent decision by Russia to stop grain exports last summer had lent support to wheat prices.

Too much rain in the European Union, Canada and Australia had also contributed to production problems, Lewis had noted.

Still, wheat inventories remain at high levels, and the floods that hit Queensland, Australia will have limited impact on overall wheat production because Queensland represents only 7% of the country’s production — with most of it having already been harvested, according to the analyst.

“In the absence of any further supply disruptions we would expect wheat to under-perform relative to corn and soybeans given the more generous level of inventories,” he said. “We expect the weather induced rally in wheat prices to fade during the coming year.”

Waverly Advisors strategist Andrew Barber said Waverly has had a long wheat position since Jan. 5. “It’s our expectation that, in addition to fundamental and macro drivers, the grain markets have the potential for narrative event driven bubbles similar to last year’s,” he explained.

Corn:

“We view physical fundamentals in corn as extremely tight,” Lewis of Deutsche Bank said in a special report on corn. “Inventory to use ratios are precariously low, Chinese shortages are rising and the US ethanol industry is absorbing an increasing share of the U.S. corn harvest.”

Lewis said that global corn inventories are currently equivalent to just 57 days of consumption — close to its lowest levels since the mid-1970s.

Meanwhile, he expects demand for corn as a feedstock for the ethanol industry to continue to grow, citing the U.S. Environmental Protection Agency’s approval of the raising of the blend of ethanol in gasoline to 15% from 10% as one reason. Previously, this increase was limited to cars and light trucks less than three years old, affecting merely 18% of the U.S. car fleet. This year, Lewis expects the EPA to extend this increase to car and light truck models up to ten years old, affecting more than 50% of the U.S. car fleet.

The analyst also noted that another somewhat bullish trend for corn is China’s deteriorating agricultural trade position. The country’s largest agricultural imports have been for soybeans and cotton, but recently it has also begun to import corn — though in small volumes.

The price rallies in corn could significantly exceed historical averages, the analyst predicted.

“We would view attempts to secure food supplies via export bans as the main hazard in 2011 as such measures have typically encouraged price spikes across the sector,” he added in a weekly commodities report.

In a Feb. 13 report, Morgan Stanley analyst Hussein Allidina noted that corn ended last week up 4.1% week-over-week after the U.S. Department of Agriculture again raised its estimates for U.S. ethanol production. In another report, the analyst said that two weeks ago corn led the space higher on strong weekly ethanol production numbers and rumors of Chinese buying.

Battle Creek, Mich.-based Kellogg recently raised prices to help offset rising ingredient costs.

In its recent earnings report, the maker of Corn Flakes cereal, Cheez-It crackers and Famous Amos cookies said it plans to raise prices again in 2011 in a range of 3% to 4%.

The company and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods.

Coffee

Christian of CPM Group said he thinks coffee will tread between $2.45 and $2.60 a pound over the next week or so amid supply concerns and large long positions by investors.

Recently there’s been some supply concerns in Guatemala, the largest producer in central America, and Brazil. “Some Brazilian producers appear to be withholding some of their crop in the expectation of some higher prices,” he said.

Christian said there’s also been investors adding to their long positions on the Comex commodity exchange, which “going forward, cuts both ways.” Christian explained that this inflow of money is, on the one hand, driving up prices. On the other hand, if investors believe that the prices have already peaked, they can dump their positions and the price could level off.

“But right now they have a relatively large long position and that could help keep the price up for a while. We don’t necessarily see it moving sharply higher in the near term,” Christian said. “But basically staying high.”

Christian noted that there’s been a drive to encourage the consumption of chilled coffee drinks, as coffee producers try to drive away the seasonality associated with coffee demand.

Coffee prices rose 1.8% month over month or 86% year over year in January, according to Jonathan Feeney of Janney Capital Markets.

PFGBEST’s analyst Robin Rosenberg noted in a weekly report that results from the latest coffee harvest were “extremely good” to “just a shade above expectations.”

The weaker harvests were a results of poor growing weather in some of the coffee growing regions, according to Rosenberg. The strategist said that Cameroon’s Arabica coffee exports between Oct. and Dec. 2011 were 18 metric tons, unchanged from a year ago. And in Uganda, January coffee exports dropped to 215,180-sixty kilogram bags, 18% lower from a year ago. Uganda’s February coffee exports were expected to fall by at least 30%, he said.

“Quality issues are beginning to show their face and have cash market participants paying premium prices for high quality coffee beans,” Rosenberg added. Meanwhile, “a strike by Colombian truckers continues. If they do not settle over the next few weeks, coffee in storage could begin to deteriorate,” the strategist warned.

In August of last year Kraft raised prices on select products from its Maxwell House and Yuban ground coffee brands by more than 10%. It also raised prices on its instant coffee products.

In December, Kraft raised prices again — by about 12% — on its roast and ground coffee products under the Maxwell House and Yuban brands. Northfield, Ill.-based Kraft Foods, through its subsidiaries, manufactures and markets packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products.

In December, the CEO of Seattle-based coffee company Starbucks , Howard Schultz, called the 50% spike in coffee futures “tragic,” blaming financial speculators for the run-up in prices.

In its fiscal second-quarter earnings report in November, Orrville, Ohio-based branded food products company J.M. Smucker said “escalating commodity costs will continue to present challenges.” On Feb. 8, Smucker said it raised retail prices for most of its coffee products — particularly those under the Folgers and Dunkin’ Donuts brands — by about 10%, following two price increases in 2010, as unroasted bean prices continued to rise.

Downers Grove, Ill.-based packaged foods company Sara Lee said higher food costs led the company to miss fiscal-second quarter earnings expectations. It said commodity costs increased by $127 million last quarter, and by $219 million in the first half of its fiscal year.

Cocoa

Christian of CPM Group said on the demand side, cocoa is just modestly higher.

At the same time though, there have been some supply concerns driven by political problems in the Cote d’Ivoire, West Africa, the largest producing country of cocoa. These political issues have led to a one-month export ban on Cote d’Ivoire cocoa as pressure is applied to the government to force the president to step down. “There’s an ill ease in the cocoa market because of the political risks within Cote d’Ivoire. And that has pushed the price up.”

Still, Christian noted that overall supply shouldn’t experience any shock given that the current political situation doesn’t’ affect any of the cocoa that’s already been licensed for export. In addition, cocoa exports in Cameroon and Ghana have likely been rising.

“Our expectation is that the price could actually come off some more, but stay relatively high.”

CPM Group predicts that cocoa prices will stay above $3,100 dollars a metric ton for the next week or so, at least.

PFGBEST’s Rosenberg said Cote d’Ivoire’s unrest has caused many cocoa farmers to flee the country in fear for their lives. Many of those Cocoa farmers had been trained and certified to farm cocoa by a Fairtrade training program, Rosenberg noted in a weekly report. “The training programs have been halted as well. This will leave the country’s cocoa industry with a shortage of capable farmers. It could take three or more years for the number of certified farmers to reach its former level,” he cautioned.

Penn.-based Hershey, which is engaged in the manufacturing, marketing, selling and distribution of packaged chocolate and confectionery products, food and beverage enhancers, and gum and mint refreshment products, said it expects adjusted gross margins to be relatively flat year-over-year in 2011 despite “meaningfully higher input costs.”

The maker of Reese’s, Twizzlers and Kit Kat confections brands said despite the higher ingredient costs, “productivity and cost savings initiatives are in place” and “we continue to leverage the global go-to-market capabilities we have built over the past few years.”

Sugar

“We think think sugar prices, which are already high, could trend a little bit higher,” CPM’s Christian said.

Supply concerns have stemmed from the flooding in Australia, which have damaged the sugar crops there. Production is also falling in India, a very large producer and also the largest consumer of the crop.

Indian production is currently projected to be at about 24.5 million metric tons this year, which would be down from earlier estimates of around 26 million metric tons, said Christian.

Demand for sugar remains strong, globally, with Egypt also being one of the big sugar consumers.

CPM Group predicts that sugar will head back toward 36 cents a pound over the next week or so.

“The sugar market appears as if a new leg to the upside is about to begin,” PFGBEST’s Rosenberg said in a report. Not only has the crop been damaged by the flooding in Australia, equipment will needed for sugar cultivation has also been damaged, the analyst noted. Rosenberg said losses to growers are estimated to be at A$500 million, or $499.9 million — from a conservative view.

Rosenberg added that strong energy prices have diverted sugar from food use to ethanol refining recently.

Orange Juice

Frost damage prompted the U.S. Department of Agriculture to lower projection of Florida’s orange crop, which has dominated talk of the orange juice market.

CPM Group predicts that orange prices will retest the $1.80 level in the near term after receding to about $1.65, then to about a $1.72, from $1.80 in early January.

The supply constraints come as demand weakens over the last several years. “People see it as a fattening thing because of its high sugar content,” Christian explained. “So you’ve actually seen people cycle away from orange juice.”

Supply concerns from Florida and Brazil should allow prices to drift higher though, Christian said.

Oak Brook, Ill.-based fast-food restaurant franchise McDonald’s said it anticipates needing to raise prices on some of its offerings this year in order to offset rising ingredient costs, Chief Financial Officer Peter Bensen said on a conference call with analysts following its recent earnings release.

McDonald’s anticipated that costs will rise between 2% and 2.5% this year in the U.S. and between 3.5% and 4.5% in Europe.

Meanwhile, the CFO of Purchase, N.Y.-based packaged foods and beverages behemoth PepsiCo, Hugh Johnston, said he expects PepsiCo’s commodity costs to rise between 8% and 9.5% in 2011. Pepsi owns the Tropicana juice label.


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