The man who turns wheat into gold (start of 15 year boom?)

SURGING demand from China, a craze for biofuels and difficult weather conditions have made agricultural commodities one of the hottest investments of the past year.

Everything from wheat to soyabeans is at or near record highs with gains of up to 100%, but the question is, can the boom last?

One man who ought to know is Christopher Wyke, one of Schroders’ commodities team, the investment brains behind its Alternative Solutions Agricultural Commodities fund.

While many of its rivals have struggled to make profits during the past six months, the £6 billion Agricultural Commodities fund is up an impressive 35%. Since it was created 17 months ago, it has risen 45%, according to Morningstar, a data provider.

The fund has been such a success that last week it shut its doors to new investors. The managers believe they can produce better returns by remaining small and nimble.

However, investors can still tap into the team’s talent using its sister fund, Alternative Solutions Commodities, which is up 47% since it was launched in October 2005. It provides exposure to agricultural commodities alongside metals and energy.

Wyke, 52, could just as easily have ended up in politics. In the late 1970s his first job after leaving Edinburgh University was as a speechwriter for Margaret Thatcher, then in opposition.

He was lured to the City, where for most of his career he worked as a bond-fund manager. It was only after he had joined Schroders in 2000 that he was offered the chance to move into commodities.

Why are food prices so hot at the moment? Demand for the three Fs: food, feed and fuels. Most of the demand for food and animal ent on oil. The US is producing about five billion gallons of bioethanol a year, has 120 bio-fuel production plants and is building 68 more. But there is room for massive growth.

As with tech, though, aren’t we seeing a bubble? Not at all. We are at the start of a super-cycle that will see commodity prices trend upwards for the next 15 years or longer.

Commodity cycles tend to last an average of 20 years. We are only in year six with oil, year four with metals and year two for agriculture.

Isn’t there a risk farmers will just plant more crops and flood the market? There is a growing shortage of arable land. In Asia, it is estimated that 75% of land that could be used for crops is already under cultivation. In India that rises to 95%.

China has actually lost 9% of its arable land in the past 10 years as more of its population move into towns and cities. Desertification is also a problem, as is a growing shortage of water.

It’s true farmers planted more corn in the US last year because of demand for biofuels. However, that was at the expense of crops such as wheat and cotton, which, as a result, have risen more sharply in price than corn.

It’s likely that this year farms will plant a lot more wheat because the price is so high, which will probably lead to wheat prices weakening.

If you don’t like wheat, what would you invest in? We’re expecting coffee prices to rise sharply.

Consumption is rising in developing nations: in Brazil, Indone-sia and India it has risen about 50% in the past 10 years. In Mex-ico, it is up more than 120%.

We also have high hopes for cocoa, orange juice and cotton. Livestock is worth looking at too. If you are a pig farmer you are suffering because grain prices are rising. So what are you going to do? Sell off your breeding stock, which creates a shortage.

It’s likely we’ll see sharp rises in pig and cattle prices this year and next.

Oil reached a record high of $103 a barrel last week. Will it go higher? Over the long term the oil price will remain strong. But given the US is heading into recession and the rest of the world is slowing, the potential for a big increase in the oil price this year is limited.

What about gold and other metals? Gold will continue to go higher, driven by demand from investors worried about recession, the weakness of the dollar and the banks. Gold could reach $1,200 a troy ounce or even $1,500.

Couldn’t a global recession spoil the party? If there’s a prolonged global recession it won’t be good news. All investments are going to go down in that environment, but it is likely commodities will do better than most.

SEVERAL exchange-traded commodities (ETCs) on the London Stock Exchange track resources. ETCs mirror the performance of an underlying index but can be bought and sold like ordinary shares.

Wyke also recommends Potash Corp of Canada, as demand has soared for fertiliser. Other stocks to consider include Mosaic and Agrium.

feed is coming from developing countries like China, as they move from a predominantly vegetable to a meat diet.

A meat diet is a very inefficient way of feeding the world. To produce 1kg of beef you need about 16kg of cereal feed such as wheat or soyabeans. But that has been great news for cereal prices.

The growth in biofuels is principally being driven by the West, particularly America, as governments don’t want to be depend-

This may amuse you, or it may not.

In 1973-74, I heard very nearly the exact same words spoken. At the time, I was a futures broker.

The very nice thing about markets is that EVERY super-bull mkt contains the seeds of the next bear mkt.

Skeptical? Well, you could ask the farmers who bought up scads of acreage in 1973-75, only to go bust within a couple of years.

Or not. LONG is the correct position just now, but this is NOT a permanent condition. If you like (or not, doesn't matter to me either way) I'll tell you specifically on what day to get short in various mkts.

Markets are markets. One must learn their behaviour before one can attempt to trade them with any degree of confidence.

Here's a freebie. OPEC meet on 5 March next. There's a whole bunch of speculation that OPEC will announce production cuts. This is rubbish, pure and simple. OPEC have not the slightest intention of cutting production (nor would you with WTI crude over $100/bbl).

When it plays out that they don't intend to cut, those traders who have wagered on a cut (i.e. the 'spec' longs) will dump their positions RIGHT quickly, and WTI will take a $2.00-5.00 hit. How to trade this event?

Well, there are several ways. The one I prefer (and make NO mistake about it, I shall enter this trade at Tuesday's close) is, once OPEC have announced their non-cut on 5 March, to have entered orders at the mkt close on 4 March to sell April WTI crude 75 pts under the 4 March close and to buy it back 45 pts lower than that.

The historical success rate of such a trade is well over 90%. You can verify this oddly consistent trading idea out for yourself at Time & Timing. Totally free, very short signup.

Perhaps you should become a futures trader. If you decide to do so, please become an informed one. If not, well, thanks for the money -- because I and others will take your capital from you, mercilessly, and every bit as surely as the sun rises in the East.

Best wishes, FReegards, and good trading to you!

The gist of it all is that people mostly do not understand markets. Thank you for the illustration of that point.

Buying shares of IBM is one thing...it helps to encourage expansion, hiring, etc.''

I wrote about folks who hold that viewpoint in 'Trading Options to Win', (John Wiley & Sons, 2003). You might be interested to read Chapter 4, ''Just the Facts, Ma'am: Avoiding Moonshine, Morons, and Myths''.

Unless you purchase shares of a company in an IPO or in a treasury stock offering, the company itself never sees a penny of your capital, and your capital has no effect at all one way or the other on the company's prospects. The myth that your purchase of open market shares 'helps' a company in some mysterious way may be the single most widely held myth in all of the world of finance.

... its people speculating this way on oil in both directions that cause it to be where it is at today.

Uh, if they're speculating in both directions, why is WTI crude up 67% in 2 years' time, basis 28 February? Since mid-2002, the number of open contracts in WTI crude at the NYMEX has roughly tripled. The bulk of the new traders/investors happen to be bulls. When the demand for commodity X, for whatever reason, exceeds the ready supply, or the participants in a market come to believe that demand will in future exceed the ready supply, price increases.

In any given futures market, a buyer can only buy the product when there is a willing seller. The number of longs and the number of shorts is equal, always and at any time. When, over time, new buyers appear, their very numbers outstrip the number of sellers. The sellers then become less willing, and in some cases (viz. platinum recently) generally unwilling, to sell at the previous price P. The would-be buyers are thus forced to raise their bid above (or way above) P, and we come to the situation we have now, namely some number of wildly bullish mkts.

The other way to say this is that sellers come to have what they consider to be a good reason to hold their goods rather than to sell them straight out: the prospect of higher prices. When the would-be buyers become discouraged of buying at the now-higher price Q, the market normalises ('clears' is the usual term, btw), and, --surprise!--, price stops rising.

Now, as to the short side scalp I discussed, I'm afraid you're in error again. Whether or not you ''feel right'' about any particular style of trading, the answer is very simple: if you don't, then don't trade in that fashion.

To impute, however, that I and/or other traders ''put absolutely nothing'' (your words) into producing the product involved is simply false to fact. We put enormous time and effort into finding ways of understanding what affects a market at a given time, and of understanding the thought processes of those folks who are already in that mkt. Further, we put up quite a tidy amount of capital, which we can very easily lose if our perspective should prove to be incorrect. Time, effort, and capital. Gee, sounds just like a business, now doesn't it?

And so it is. The chain of business doesn't only involve production. There are distribution, processing, tax management, sales, and -- above all -- risk management to be considered. This last, of course, is the purpose of futures mkts: to allow the transfer of risk from producers and users of a good to other parties, voluntarily.

Such a transfer of risk is enormously beneficial to the economy and to the nation as a whole. The farmer is able to lock in a price for his grain -- IF he wishes to -- and that element of his risk, a possibly falling price in the future, is no longer of any worry to him. He can then turn some of his mental energy to other tasks, and unquestionably will sleep better at night. So also with the miller and the baker; they can lock in the price of their future supplies of wheat, risk completely (or partially, at their option) eliminated, and get on to other things, doubtless becoming more productive in the process.

However, without a futures market, neither of these happy outcomes could occur, except rarely and by accident. When a given farmer's crop is harvested, a given miller or baker may or may not be buying at that time -- without the existence of a broadly traded market. When a bakery wants to put out a new and different product, or to expand production of its existing products, the baker may or may not be able to find someone to sell him his flour at a particular time -- without the existence of a broadly traded market.

And no broad market exists for very long w/o traders. The examples are legion of mkts failing (and closing) for want of traders' participation, even within the past 30 years. Soybeans are a big market, right? (Trust me, it's huge.) Why did the contract for Brazilian soybeans (which ticker symbol was, amusingly, BS) just close its doors last year? It's been relaunched on a different basis, but it went straight belly-up...for lack of traders' interest. The exchange on which that market traded wasn't able to guarantee a number of things that traders insist upon, the trustworthyness of Brazil and its socialist leader, to name one big thing. No traders, no market, a lesson learned time and time again.

Now, we traders aren't public servants or anything like them. We're businessmen -- well, we are if we intend to survive and prosper.

< insert most of Francisco d'Anconia's famous ''money speech'' right here >

Granted that there are cheats and would-be cheats in every form of human endeavour, and excluding them from discussion for a moment, a freely traded market is the most moral thing in the world. Trade or don't trade -- your choice. Trade in a particular fashion, or not -- your choice. The only thing that is involuntary about a freely traded market is the trader's acceptance of and obeisance to the rules of that market.

What of those 'traders' who don't play by the rules? Cheats and would-be cheats get kicked right out of markets on an unfortunately too-regular basis, and good riddance to them. The Amaranth fund 2 years ago was one such (and, luckily, they lost hundreds of millions in their scheme, too). The MF Global trader who, just last week, decided to trade WAY in excess of his capital? Gone. And broke. And a good thing, too. When they cheat, they get caught, usually very quickly, and they get expelled from the world of trading without exception. The only bad result is that, occasionally, one or another of such cheats are allowed to rejoin the trader's world at a future date.

Can you say the same of any other activity? Law? Don't make me laugh. Bill Lerach is still practicing, I believe, and if he isn't, there are thousands of similarly corrupt 'lawyers' who are. Government? Hah! Just say the name Kennedy to yourself 3 or 4 times, 40 years of corruption and still going strong. Education, where there are hacks without number who have ''tenure'', a guarantee of a job without any demonstration of effort, good will, integrity, or competence, and which is drowning in a sea of moral relativism? General business, where it can easily take years to spot a cheat and years more to exclude him?

What is the benefit when you jump in with a speculative overnight “trade” ...

Whose benefit? Mine is clear enough. Yours? Why should you benefit from my efforts and capital? Ayn Rand had a name for that: looting.

Society's? There's a name for those who (claim to) work for society's, or any other person's, benefit, and none other than Henry David Thoreau described such people, quite unflatteringly, in Walden Pond:

''If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life.''

''As for Doing-good, that is one of the professions which are full.''

FReegards to you! ''

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