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'Death of the supercycle' ideas misplaced - for ags at least

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Banks, most lately Credit Suisse, have been writing obituaries for the boom on investing in commodities.

This week has shown that, in agriculture at least, ideas that raw materials no longer appeal to investors may be premature.

It took a mere turn in the weather forecast to spark a recovery in Chicago corn futures, for instance, of 6%, bringing returns far higher than that for correctly-positioned investors, who need to put down only a small part of their market exposure as collateral.

Ideas that the much-reported death of the commodities supercycle – if that has indeed occurred -have quelled interest in agricultural commodities, at least, look significantly overplayed.

Grain purchases soar

Sure, there are long-term demand themes which will indeed look less appealing if China's economy slows – one central theme of the supercycle obituary writers.

China is, after all, the top importer of cotton, rubber and soybeans, among other agricultural commodities, and a substantial buyer of the likes of sugar and palm oil too.

But economic prowess is only one dynamic in crop markets. Domestic production – or the lack of it – matters too.

Even as the likes of UBS have been recommending investors switch to equities, as growth in China's appetite for many industrial metals fades, the country has been snapping up corn and wheat hand over fist, after a rain-hit wheat harvest.

The US Department of Agriculture on Friday unveiled the sale of 960,000 tonnes of US corn to China, which was on Thursday revealed to have bought 1m tonnes of US wheat last week too.

Benefit of shorts

And even if prices do fall, that it not quite the turn-off to investors as is commonly perceived.

One of the benefits to investors of commodities is that it is as easy to bet on falling prices as rising ones.

It is a common misconception that the falling net long position that managed money holds in agricultural commodities is necessarily a sign of reduced enthusiasm for the asset class.

While investors do appear to have withdrawn cash from some vehicles of agriculture market exposure, such as exchange traded products, in the main US-traded crop futures and options, hedge funds' open interest stood at 1.62m contracts as of last week, according to Rabobank.

That is up more than 200,000 contracts so far in 2013.

Sector appeal

Sure, investment fashions – the pull from equities being one for 2013 - will have a large bearing on fund behaviour.

Agricultural commodities retain appeal to investors come rain or shine. Indeed, that is precisely the point. Every turn in the weather offers profit for investors correctly positioned.

Furthermore, the relatively rapid production cycle for many traded agricultural commodities, and limited storage periods, cuts the risk of markets becoming bogged down, as in many industrial metals, with output and storage dynamics which can take many years to work through.

Also, the range of contracts on offer - from cotton and rubber exposed heavily to economic growth, to livestock futures, which move in tune with US drought and grain prices, and sugar, influenced heavily by India's monsoon and the Brazilian real – offers huge diversity of supply and demand influences.

Enough, indeed, to challenge any simple supercycle analysis.

By Mike Verdin

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