By Chanyaporn Chanjaroen and Tony Dreibus - Oct 6, 2011 8:38 AM GMT+0700
Corn, wheat and gold will beat other raw materials this quarter as crop yields drop and Europe’s debt crisis stokes demand for bullion, said David Hemming, who helps oversee a fund that returned 20 times the average this year.
Corn may rally 19 percent to $7.25 a bushel, wheat may climb 19 percent to $7.50 a bushel and gold may gain 13 percent to $1,850 an ounce by December, said the London-based fund manager for Hermes Investment Management Ltd. He advises on allocations in the $130 million DB Platinum V Hermes Absolute Return Commodity Fund, a mutual fund which made 12 percent in the first eight months. That compares with a mean return of 0.6 percent across commodity hedge funds tracked by HedgeFund.net.
Commodities entered a bear market last month after tumbling more than 20 percent from this year’s peak in April, on concern that slowing growth will curb demand. While consumption of everything from copper to oil and silver fell in 2008 during the worst slump since World War II, demand for gold and corn grew.
“The biggest potential is the grains,” said Hemming, 30. Gold is “a good hedge against any run in the European sovereign debt and banks, and any macro-driven routs in the U.S.”
The Standard & Poor’s GSCI gauge of 24 commodities fell 6.3 percent this year with sugar, wheat, natural gas and oil among the decliners. Gold was the one of the best performers, along with hogs and cattle, while corn ranked 10th.
Equities, Bonds
The MSCI All-Country World Index of global equities lost 16 percent this year, while Treasuries maturing in 10 years or more returned 29 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. European policy makers are working to halt a debt crisis and avoid a default among euro members that may be led by Greece.
Investors withdrew $1.08 billion from commodity funds in the week to Sept. 28, the most in more than a month, according to data from EPFR Global, a Cambridge, Massachusetts-based research company. Money managers cut combined net-long positions, or bets on higher prices, across 18 U.S. commodity futures and options by 26 percent in the week to Sept. 27 to the lowest since July 2010, Commodity Futures Trading Commission data show.
Corn fell 23 percent to $5.925 on the Chicago Board of Trade last month, the biggest drop in at least five decades. Futures tumbled on speculation that prices which reached a three-year high in June would crimp exports, spur livestock farmers to switch to other feeds and curb demand from refiners who use the grain to make ethanol. The U.S. Department of Agriculture forecast Sept. 12 that global stockpiles will shrink for a third year, driving inventories to a five-year low.
Yield Forecast
“While the recent selloff has tempered our price expectations, it has also done nothing to ration demand,” said Hemming, who helps manage about $1.7 billion in five commodity funds for Hermes. The next USDA estimates, scheduled to be released on Oct. 12, will probably show more cuts in yield and acreage forecasts, he said.
The return of La Nina, a period of cooling equatorial waters in the Pacific Ocean, may mean dry weather in parts of the U.S. and South America and lower yields, Hemming said. Argentine farmers began planting corn in September and sowing starts this month in Brazil. Weather patterns are within “weak La Nina-like territory,” Australia’s Bureau of Meteorology said in a report Sept. 27.
Most Bullish
Corn is trading at a 3.3 percent discount to wheat, which can also be used as a livestock feed, compared with a premium of more than 5 percent in June, data compiled by Bloomberg show. That’s still above the average discount of 27 percent over the past five years. Wheat declined 32 percent since reaching a 2 1/2-year high of $9.1675 a bushel in February. Speculators are their most bearish on the grain since June 2010, holding a net- short position of 36,215 contracts, CFTC data show.
Wheat futures may climb if money managers close out short positions, said Hemming. Wheat fell 23 percent last month, the biggest drop since 1974. Combined inventories of corn, wheat and barley will decline for a second consecutive year by the end of this season, reaching the lowest since 2008, according to U.S. Department of Agriculture data compiled by Bloomberg.
Hermes’s absolute return fund makes bets on the direction of prices and also changes in the relative value of different commodities or settlement dates, said Hemming, who worked at State Street Global Advisors Inc. before joining Hermes in 2006.
Absolute Return
Hemming also helps manage the $85 million DB Platinum V Hermes Enhanced Beta Commodity Fund, which returned 8.2 percent in the first eight months. The fund, together with the absolute return fund, is part of a venture with Frankfurt-based Deutsche Bank AG, Germany’s biggest bank. Hemming additionally helps manage $1.5 billion through Hermes Commodities Index Strategy, Hermes Commodities Index Plus Strategy and Hermes Commodities Alpha Strategy.
The Absolute Return Commodity Fund and the Enhanced Beta Commodity Fund comply with UCITS III, or Undertakings for Collective Investment in Transferable Securities, which means retail investors in Europe can place money with them.
Gold dropped 15 percent since reaching a record $1,921.15 on Sept. 6 as investors sold the metal to cover losses in other markets. Holdings in exchange-traded products backed by bullion fell 3.7 percent since reaching an all-time high of 2,299.8 metric tons in August, data compiled by Bloomberg show.
Hemming’s forecast for prices echoes bets in options on futures traded on the Comex exchange in New York, where the most widely held contract gives the holder the right to buy gold at $2,000 by November. Goldman Sachs Group Inc., which is advising clients to buy December futures, predicts $1,860 in 12 months, according to an Oct. 4 report.
Silver, Platinum
The metal’s 15 percent advance this year compares with a 1.8 percent drop for silver, the precious metal most used in industry. Platinum, used in autocatalysts and jewelry, retreated 15 percent and is on track for its worst year since 2008.
The International Monetary Fund said last month that European lenders face as much as 300 billion euros ($400 billion) of credit risks because of the debt crisis. Banks were the second-worst performing group in the Stoxx Europe 600 Index this year, behind basic-resources companies, losing 34 percent.
“We look to be long gold because of our concerns surrounding Europe, because the problems don’t look to have been solved in a meaningful way,” Hemming said.
To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net; Tony C. Dreibus in London at tdreibus@bloomberg.net
To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Claudia Carpenter at ccarpenter2@bloomberg.net
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