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Hedge Fund Deleveraging and the Real Agri-Foods Trend

Commodities / Agricultural Commodities Oct 12, 2008 - 04:41 PM GMT

By: Ned_W_Schmidt

Commodities Best Financial Markets Analysis ArticleWith the welcome liquidation of much of today's hedge & speculative fund industry, equity markets of the world have been ravaged. Investors, globally, are focused on what or whom will fail today. Death of this massive group of momentum traders, while painful now, is actually a welcome event. For however complex their algorithms and for however powerful their computers, heart of those systems is no more than momentum models.

Good news in all this financial carnage is that we may return to to a world of investing, rather than leveraged day trading of today's news stories. Investing means looking for trends that will unfold over the year and years ahead, and those that will participate in those trends.

This week's graph is of cash broiler, or table chicken, prices. This is one of those markets where trading funds do not seem to be either able to or interested in playing. Those funds are too busy ravaging markets for corn and soybeans, where plenty of day trading news, or noise if you prefer, is readily available. That trading now almost insures that global grain production will be down in coming year, and that prices will move higher.

Rising price of broilers, naturally in an irregular manner, is a reflection of the global trends in demand for Agri-Food. And by the way, chicken is a grain bargain. Each additional pound of chicken consumed increases grain consumption by only about two pounds. Yes, as the world eats less grain and more meats, the consumption of grain actually increases. Street traders, economists, and strategists may be surprised to discover that chickens are not made in a factory.

Far too many investors are naively extrapolating the conditions of the 1930s to today's time. That would be an error. Global agriculture had been in bear market for more than a decade when 1930 arrived. Henry Ford played a major role in that development, and his equivalent is not around today. Conditions today in world's Agri-Food industry are not a mirror image of that era. History is a guide book, not a script or cookie cutter. If that were not the case, we would never be surprised.

Hedge funds can not stop people in China and India from consuming more Agri-Food over time. With the massive interference in grain pricing mechanism by hedge & speculative funds, we need to seek out signs of the true fundamental trends. Broilers, as portrayed above and butter, are indicators of those true trends As investors turn to seeking those investment themes that will dominate tomorrow, banks and insurance companies will not be mentioned. Technology stocks? Oh yes, but the technology will relate to how to grow a better chicken or create a better rice seed. One of the few groups of investments with positive fundamentals for 2009 and beyond is Agri-Food. Is your portfolio positioned for tomorrow, or is it mired in yesterday's losing ideas?

By Ned W Schmidt CFA, CEBS

Copyright © 2008 Ned W. Schmidt - All Rights Reserved

AGRI-FOOD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of Agri-Food Value View , a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To review the most recent issue go to

Ned W Schmidt Archive

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