Institutional Investor's Alpha Magazine - February 2008 - (Page 31)

tion, but growing more corn will take land away from the cultivation of other grains and vegetables, ultimately forcing prices for those products higher, too. “If the only hurdle that we had to face in the world was rising meat consumption, we could handle that relatively easily within the existing agricultural framework of land and productivity improvements,” Anderson contends. “The problem is that the soft-commodity markets are but a drop in the bucket compared to the ocean of the energy markets — and the tiny bit of demand that has been siphoned off from energy into agriculture has already pushed prices to explosive levels.” Both Anderson and Wrobel believe that commodities prices may have further to go. An avid student of history, Wrobel sees correlations between the current environment and the bull market in commodities that began in 1897 and accelerated in 1906, because world markets were becoming more global at the turn of the century, industrialization was accelerating (and with it, urbanization) and geopolitical tensions were running high — ultimately erupting in 1914 with World War I. That bull market lasted 23 years, and commodities prices rose by a combined aggregate of 326 percent by 1920. “We are living in a similar situation now,” Wrobel explains. “Globalization is accelerating and industrialization is concentrating population growth in the cities. Geopolitical tensions are also an issue, with the Middle East situation, Russia and Venezuela, and the balance of economic power is now shifting from the U.S. to China and greater Asia — just as it did a century ago from Great Britain to the U.S.” Wrobel thinks that commodities prices will have to rise sufﬁciently to warrant major reinvestment in infrastructure and the cultivation of new land — boosting supply — before they begin to abate. Though price shocks may yet occur, he believes we are only seven years into the new bull market in commodities. Diapason has been busy designing indexes and related products for the growing market. The ﬁrm began in 2003 with a broadly diversiﬁed commodities index fund, but over the past 24 months, its founders have begun to develop a range of sector-speciﬁc index funds to help investors gain access to particular areas of the market, like biodiesel and non–genetically modiﬁed crops. In February 2006, Diapason launched its ﬁ rst dedicated global biofuel index fund in partnership with UBS. In October 2006 the ﬁrm created a commodities futures index fund based on non-GMO crops to take advantage of the political distaste in Europe for bioengineered grains. The resulting product, the Diapason Commodities Agriculture Non-GMO Index Fund, has had exceptional performance and was up 64.92 percent last year. More tellingly, however, the long-short agriculture fund that Diapason launched on December 15, 2007, has not done as well, delivering a return of just 4.5 percent through February 12 — proof that trying to mitigate risk in the current markets may be more difﬁcult than making a directional, long-only bet, even if it is subject to greater volatility. Photo by Stephanie Diani/Aurora for Alpha Prices may yet come under pressure, however, if the political mood changes. A growing backlash against biofuel has just begun in Europe, where consumers have started to question the potential environmental costs of production — especially when rising markets mean that more land has to be farmed globally, and deforestation is already rampant in Brazil and Indonesia. Although the EU and a number of national governments have proposed regulations, such as stipulating that imported biofuels cannot come from land that was previously rain forest, those measures may not be enough: Two scientiﬁc studies published this month in Science magazine conclude that the huge carbon dioxide emissions required to clear farmland and harvest and transport crops make biofuel environmentally noxious. But soft-commodity prices, while ever in ﬂux, seem unlikely to ease anytime soon, according to Merrill Lynch’s Blanch, who believes that agricultural markets are likely to tighten even further in the near term — particularly in a U.S. presidential election year. To date, only Republican John McCain has spoken out about possibly rolling back ethanol subsidies; neither of the Democratic candidates, Hillary Clinton nor Barack Obama, has seemed willing to reconsider the subsidies, despite their probable effects on food prices in the U.S. — and the consequences they may yet have on the global climate. If anything, as the primary in Iowa proved, the latest crop of presidential candidates is more than willing to discuss raising ethanol production levels — which may be politically expedient and highly proﬁtable for U.S. farmers and agribusiness companies in the near term but may ultimately come at an unknown, unrecognized and potentially devastating cost. “Global drought is my worst nightmare,” says Robert Greer, head of realreturn products at Paciﬁc Investment Management Co. FEBRUARY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 31

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2008

Institutional Investor's Alpha Magazine - February 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Alternative Perspective The Good Guys: A Simple Plan Cover Story: Energy and Commodities: Fueling Opportunity Regulation: Energy Trading: The Brawl on the Hill Interview: Master of Values Regulation: Hedge Fund Registration: Way Out West Research Center: Top Hedge Fund Analysts Alpha Bytes: Rocket Man Unhedged: Commentary: Structured for Success

Institutional Investor's Alpha Magazine - February 2008

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