Agricultural commodity prices are likely to fall in the short term as investment funds exit the market but should recover eventually in line with their fundamentals, fund managers told a conference Oct. 7.
Asked what impact the financial crisis would have on staple food commodities such as sugar, wheat and coffee, Chris Armitage, managing director of Four Winds Capital Management, which includes an agriculture fund, said: “Probably not much, because this is all the stuff we have to eat.
“Wheat and protein are necessary for us to live on. Prices will be squeezed (down). But it’s short term. The levers of supply and demand will rein in these products. We need to eat, and if we don’t have enough food, the price will go up.”
Soft commodity futures have fallen sharply in recent weeks as investment funds cut their risky exposure to obtain cash during the world’s worst financial crisis in 80 years.
Doug King, co-founder of Aisling Analytics, which manages a US$2 billion fund, said agricultural commodity markets were correcting to the marginal cost of supply – the price at which it makes sense for farmers to grow crops – as investment funds exited their positions.
A number of commodities businesses were struggling to meet their obligations due to a tightening of credit lines, fund managers said.
“If you want to invest in commodities, there will probably be some cheap assets soon as people can’t finance their sugar mills,” King said.
Soft commodity specialists said that in come cases agricultural commodity prices risked falling below the cost of production if producers were desperate for cash.
“If you get down to the marginal cost of supply, and if you have stocks, and you need cash, prices can go below the cost of supply,” said Jonathan Kingsman, managing director of Lausannebased sugar and ethanol consultancy Kingsman.
James Mound, president of Florida-based JMTG, a commodities brokerage, said, “If you have to put money in the bank, you have to sell – whatever the cost.”
Lars Steffensen, managing director of Londonbased Ebullio Capital Management, which trades commodities from metals to softs, told Reuters futures risked falling below marginal costs of supply, but should eventually bounce back.
But he said he was deeply pessimistic about the outlook for the global economy in light of the credit crunch, and said the world economy could face two or more years of pain before recovering.