Old McHedgeFund now has some farms

by Michael Arbow, MBA

Partner, RSD Solutions.com

www.RSDsolutions.com

info@RSDsolutions.com

 

Occasionally this blog talks about the rising cost (real and nominal) of the soft commodities (food) and has also pointed out that farmland is becoming an alternative asset in the investment portfolios of billionaires; well it looks like hedge funds are now moving down on the farm.  It is estimated that US farm land will be increasing at a rate of between 5-10% per year in the foreseeable future.  Add onto this the return of the food grown and farmland is looking pretty attractive.  Of course the road will be rough (volatile) but the trend is entrenched as long as the wealth in China and India and numerous other emerging markets increases.

 

Where does that leave the food processors; the candy makers, the bio-fuel creators and the brewers? Well for them, the future will be filled with uncertain prices and shifts in consumer tastes towards alternatives.  Budgeting and price forecasting will become more uncertain as will consumer tastes as demand destruction begins to control the markets.  This world is no longer on the horizon, it is here and the hedge funds know it and are making plans to profit from it.  Meanwhile for commodity users: are they ready, has the risk team and the Board updated themselves with viable alternatives to reduce the worry and volatility, are hedging strategies been re-visited?  According to the attached article, time is running out.

 

For more on this story follow the link to The New York Observer article:

http://tinyurl.com/4yvgend

RSD Solutions – financial risk consulting and training
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Paradigm Shift: Value investing comes to commodities

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

Value investing as defined by Investopedia is a “strategy of selecting stocks that trade for less than their intrinsic values.”  In my years with brokerage firms in the England and Canada, it was very rare that commodity stocks were ever viewed as value type investments as their prices tended to be asset bubble driven.  But I have argued in the past that while commodity prices may fluctuate in the near term, in the long term the trend is up and at a rate faster than inflation.  Joining the “choir” of this thought is much-admired value investor Jeremy Grantham; chairman of global asset manager GMO LLC a firm that manages more than $100-billion (U.S.).  Mr. Grantham sites the usual reasons like increased world wealth (thanks Ben B.) but what seems to be the tipping point for Mr. Grantham is the fact that it took 100 years for the inflation adjusted price of commodities to fall 70% and only 8 years to wipe out those savings.  Mr. Grantham now sees value in investing in commodities.

 

So what does this mean?  To me it indicates that the natural resource countries, especially those that can produce commodities from below and above the surface are in for solid economic growth and currency appreciation likely for years to come.  For commodity users and end sellers, hedging becomes more important to manage potentially highly variable cash flows.  This trend is a now a reality so has your risk strategy adjusted?

 

 

For more on Mr. Grantham’s views on value investing in the commodity sector click on this Globe and Mail link:

http://tinyurl.com/3rpgnmm

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A Drive to the beach or take in a movie? Not both. Demand destruction has begun.

By Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Last week the IMF raised its expected average price of oil for 2011 from $89 to $107 (20%); about where it is as this blog is written. Note: that is the yearly average so you can expect spikes above that during the year. IMF expectations for 2012 are $108: so the IMF is advising us to say goodbye to double digit oil prices and hello to Jeff Rubin’s world of triple digit oil. What the IMF’s guesstimate is also saying is that even the surplus supply of oil is tight and that even after geopolitical tensions ease don’t expect prices to drift far below $100.  

This view of a tight global supply for crude is being confirmed by the International Energy Agency.  From a risk perspective what is coming into play now is demand destruction – the high price of a commodity that decreases the demand for the high priced good but which can also decrease the demand for other goods. This will likely be the case for oil as it is broadly considered a necessity for Western economies to operate. Thus expect reduced demands for air travel, weekend jaunts to the country and restaurant meals. This oil lead demand destruction will then translate into changes of behavior and possibly price increases for energy or activity substitutes. The question is, will this positively or negatively affect your business and how is your risk team advising you to live in this triple digit oil environment. 

 

For more on the International Energy Agency’s view of oil, click on the link to BBC news:

http://www.bbc.co.uk/news/business-13047854

 

RSD Solutions – financial risk consulting and training
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In the tank or on the plate? Bioenergy vs. Food. It’s game on.

by Michael Arbow, MBA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsolutions.com

 

 

Jeffery Rubin in his book “Why your world is about to get a whole lot smaller” talks about triple digit oil prices and the effects this will have on our economies one being the push to bio-energy; energy derived from plants such as corn, sugar cane, palm oil.  Interestingly as the price of these commodities has risen the Chinese have sought out other plants capable of producing an oil substitute.  They have recently moved to and focused on cassava, a tropical plant whose root we use for animal feed, tapioca pudding and ice cream.  While the ingenuity is admirable the effects of this and new government regulations forcing the consumption of bio-energy is having distributing ramifications namely a growing trade-off between crops for fuel or crops for food.  The upshot of this is an unstable equilibrium in food commodity prices which looks set to continue for the foreseeable future.

 

What all this means to the food processors and bio-fuel makers is that price volatility may become the new normal and having a better economic understanding of price movement causality may be beyond the skill sets of the accounting department and conceivably the more traditional risk management team.

 

 

For more on the food/energy trade-off click on the link to a New York Times article:

http://tinyurl.com/3b6tfgz

 

For more on Mr. Rubin’s thoughts on energy prices, click on the link:

http://www.jeffrubinssmallerworld.com/blog/

RSD Solutions – financial risk consulting and training
http://www.rsdsolutions.com

Price increases begat production increases begat production decreases begat,…

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

First year economic students need look no further to witness the basic world of supply and demand than in the world of cotton.  With historic high prices of cotton recently reached due to 3 years of poor crops (fall in supply) and increased wealth in the emerging economies (increased demand) the expected follow through is happening namely farmers globally are planting more cotton.  Assuming the weather co-operates the world store of cotton will soon start to increase – cotton commodity prices are already reflecting this possible reality.  However, the story doesn’t end there.  With world population growth – another 40 million in Asia alone over the next 4 years, wealth creation compliments of the US Federal Reserves quantitative easing the rate of increase in the demand for soft commodities (food) is outstripping productivity gains for the foreseeable future.  The result: the shift to increased production will mean a decrease in production of another soft and with that the price of that soft will increase.

What does this mean in the risk world?  For suppliers and users of soft commodities you are in for a wild and volatile ride and that is before natural disasters enter the picture.  The world has entered a new period of price movements which are more inter-connected and caused by shifts in production from one commodity to another rather than just meeting demand through increased planted acreage.  This, I believe will lead to greater price volatility and threaten the existence of firms not adapting through more sophisticated risk strategies.  It is time to re-think the “normal”.

For more on the price of cotton follow the link to this Globe and Mail article:

http://tinyurl.com/4s7ue63

RSD Solutions – financial risk consulting and training
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Volatility can hurt – personally or corporately

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Personally I am short Sterling and long U.S. and Canadian dollars.  Therefore I am intimately, sometimes painfully and always nervously acquainted with the recent volatility of currency exchange rates.  I wake up in mornings wondering if next week’s credit card bill or next month’s property tax can get paid. 

Against the U.S. dollar Sterling is way off where it was a couple of years ago but still significantly higher than 8 years ago.  The strength of the Loonie (Canadian dollar) is a blessing that I currently enjoy.  However, whenever news like the latest inflation figures come out (not good) or Gaddafi kills civilians, I either take a deep breath or heave a sigh of relief. 

So far I have kept out of the local mission but my concerns are a microcosm of those that all treasurers should be familiar with, whether it is currency volatility or related to commodity prices, interest rates or any other such variable. 

I feel comfortable when I manage or hedge my position in some way.  This might be converting in advance of my needs when rates are favourable or incurring an expense in dollars or gaining some income in sterling.  This is short term.  In the longer term, I might take the option I have to move back to North America! 

I do know that I am aware of my position and risks and am doing just about everything I can and that I am constantly reassessing and looking for better ways to do things.  I am also often seeking other views and ideas. 

The question every financial executive and treasurer should be asking themselves is do they have the same satisfaction that they know their risk exposures and are managing them the best they can?

RSD Solutions – financial risk consulting and training
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In today’s Oz, Dorothy’s new chant: “Oil and coffee and beer, oh no!”

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

In the 1939 movie classic The Wizard of Oz (my personal all time favourite), Dorothy, the Scarecrow and the Tin Man are walking along the Yellow Brick Road towards the Emerald City: when they enter a dark forest they begin to chant “Lions and tigers and bears, oh no!”. Putting a “liquid” commodity spin on that today, the refrain maybe: “Oil and coffee and beer, oh no!”. The move up in oil and coffee is well discussed in other RSD blogs but it appears barley can now be added to the mix with expectations of price increases hitting the consumer by 2011 year end or early next year. Better “drink-up” while you can because the Wicked Witch is heading this way. How are you preparing?

 

RSD Solutions – financial risk consulting and training
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Asia’s next export: Inflation. G20 response: Increase interest rates

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Here in the rich western world, consumers are witnessing an interesting disconnect; namely the difference between what we see at the gas pump and grocery store and what we hear when our government’s announce inflation rates.  The disconnect stems from the definition of core verse headline inflation rates. The core rate strips out the so-called “volatile energy and food prices”. Luckily, for many in the West the rising cost of food and energy is an annoyance and living with the core rate of inflation – from which the countries’ central banks base their interest rates on, is grudgingly accepted. 

On the other hand however, in the emerging economies where household incomes are lower and food and energy consumes a substantial portion of household income; national governments consider these elements as part of core inflation. Thus you are finding increased pressure for the central banks of emerging economies to raise interest rates to tame inflation and protect their currencies. The local trickle down effect of this will be for consumers to seek higher wages.  Higher wages, when combined with higher (commodity) input cost will translate into higher prices charged on manufactured products.  Once exported Asia’s pivotal role as deflation exporter will change; for their manufactured exports help constitute core inflation in the developed economies. 

As core inflation rises, so to will interest rates. If your firm is highly leveraged and thus sensitive to interest rates what steps are you taking today to reduce this future financial risk?  For the consumer, perhaps locking in longer terms rates is starting to look more attractive. 

 

For more on this follow the link to Pimco’s Mihir P. Worah’s viewpoint:

 http://tinyurl.com/4jcjnqd

 

RSD Solutions – financial risk consulting and training
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Lamborghini sales exceed forecasts in Saskatchewan and Iowa: WSJ June 2015

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Difficult to believe? This “news” headline maybe more the reality than you think. Followers of this blog know that we have blogged about the new normal of high and volatile agricultural commodity prices consistently since the beginning of this year. Indeed in the first two months of the year some basic commodities have experienced some wide swings, with agriculturals generally rising and industrials generally falling (an economic slowdown warning sign?). However, according to American Jim Rogers of Rogers Holdings in Singapore we are still in the early stages of the bull market in agricultural commodities and have a long way to go to reach inflation adjusted historic peaks. His arguments are sound; increased wealth in the emerging economies, erratic weather patterns and more people. In the longer term Mr. Rogers foresees “farmers driving Lamborghini’s and stock brokers working for them” for wealth will be created down on the farm once again. It is perhaps not surprising that the world’s uber rich are buying up agricultural land. 

If you work for a firm that represents commodity end users ask yourself; How has the corporate risk management strategy changed to reflect this new normal of volatility with the added long term uptrend in commodity prices? 

 

For more on commodity prices in perspective from CNN Money follow the link below:

http://tinyurl.com/4m9kexf 

For more from Jim Rogers follow the link below:

http://www.bloomberg.com/video/67100110/

 

RSD Solutions – financial risk consulting and training
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Déjà vu. $4.00 gas ($1.40/litre in Canada) looms on the horizon

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

If you love roller coasters, 2011 is certainly setting itself up for a wild ride stemming from commodity price volatility.  Events in the Middle East, the US Federal Reserve’s quantitative easing and globally low interest rates are providing an unstable combination of market volatility triggers.  Of note recently is the upward march of oil with Brent now trading above $105 USD.  Predictions from the markets of a 10% price increase in gasoline for the summer are given a 1:3 and prices of $4.00 at 1:10 (in California it may be occurring as this blog appears).  For those folks that drive to work and for those firms that have energy as one of their main cost drivers how do you plan cope – what is your risk management strategy to retain as much of your income as possible and thus keep cost down?  One analyst has noted that between $3.00 and $4.00/gallon “real pain” hits the US consumer. What is your company’s tolerance?

 

For a read of the original Fortune article follow the link:

http://tinyurl.com/6zq7xm9

 

RSD Solutions – financial risk consulting and training
http://www.rsdsolutions.com