Brokers chasing CFTC returns | NYT | 5 June 2008

"Farmland can be a bubble just like Florida real estate," said Jeffrey Hainline, president of Advance Trading, a 28-year-old commodity brokerage firm and consulting service in Bloomington, Ill. "The cycle of getting in and out would be very volatile and disruptive."

By owning land and other parts of the agricultural business, these new investors are freed from rules aimed at curbing the number of speculative bets that they and other financial investors can make in commodity markets. "I just wonder if they need some sheep's clothing to put on," Mr. Hainline said.

Mark Lapolla, an adviser to institutional investors, is also a bit wary of the potential disruption this new money could cause. "It is important to ask whether these financial investors want to actually operate the means of production -- or simply want to have a direct link into the physical supply of commodities and thereby reduce the risk of their speculation," he said.

Grain elevators, especially, could give these investors new ways to make money, because they can buy or sell the actual bushels of corn or soybeans, rather than buying and selling financial derivatives that are linked to those commodities.

When crop prices are climbing, holding inventory for future sale can yield higher profits than selling to meet current demand, for example. Or if prices diverge in different parts of the world, inventory can be shipped to the more profitable market.

"It's a huge disadvantage to not be able to trade the physical commodity," said Andrew J. Redleaf, founder of Whitebox Advisors, a hedge fund management firm in Minneapolis.

Mr. Redleaf bought several large grain elevator complexes from ConAgra and Cargill last year for a long-term stake in what he sees as a high-growth business. The elevators can store 36 million bushels of grain.

"We discovered that our lease customers, major food company types, are really happy to see us, because they are apt to see Cargill and ConAgra as competitors," he said.

The executives making such bets say that fears about their new role are unfounded, and that their investments will be a plus for farming and, ultimately, for consumers.

"The world is asking for more food, more energy. You see a huge demand," said Axel Hinsch, chief executive of Calyx Agro, a division of the giant Louis Dreyfus Commodities, which is buying tens of thousands of acres of cropland in Brazil with the backing of big institutional investors, including AIG Investments.

"What this new investment will buy is more technology," Mr. Hinsch said. "We will be helping to accelerate the development of infrastructure, and the consumer will benefit because there will be more supply."

Financial investors also can provide grain elevator operators the money they need to weather today's more volatile commodity markets. When wild swings in prices become common, as they are now, elevator operators have to put up more cash to lock in future prices. John Duryea, co-portfolio manager of the Ospraie Special Opportunity Fund, is buying 66 grain elevators with a total capacity of 110 million bushels from ConAgra for $2.1 billion. The deal, expected to close by the end of June, also will give Ospraie a stake in 57 fertilizer distribution centers and the barges and ships necessary to keep them supplied with low-cost imports.

Maintaining these essential services "helps bring costs down to the farmers," Mr. Duryea said. "That has to help mitigate the price increases for crops."

Mr. Duryea of the Ospraie fund dismissed the idea that financial investors, with obligations to suppliers and customers of their elevators and fertilizer services, would put their thumb on the supply-demand scale by holding back inventory to move prices artificially. "It is not in our best interests for anyone to be negatively affected by what we do," he said.

I saved it, because the news is a contra-cyclical benchmark. As institutionals' managers and speculators withdraw from futures, surplus capital will flow into intermediary assets --subject to profit maximizing expectations-- will contribute to increasing PPI in commodities. Much volatility in (real) CPI-U will result from competition to sell-off inventory, if the feds don't regulate producers' pools, i.e. price fixing.

Same as it ever was: Excess production (exaccerbated by agri-corp market share and E8-policy misallocation) demanding abnormal profit subsidy despite monopoly "scale efficiencies".

Diversity is the key to economic and political evolution.