Oil price mocks fuel realities
By F William Engdahl
Goldman Sachs again in the middle
The oil price today, unlike 20 years ago, is determined behind closed doors in the trading rooms of giant financial institutions like Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, Deutsche Bank or UBS. The key exchange in the game is the London ICE Futures Exchange (formerly the International Petroleum Exchange). ICE Futures is a wholly owned subsidiary of the Atlanta Georgia International Commodities Exchange. ICE in Atlanta was founded in part by Goldman Sachs, which also happens to run the world''s most widely used commodity price index, the GSCI, which is over-weighted to oil prices.
As I noted in my earlier article, ICE was the focus of a recent congressional investigation. It was named both in the Senate''s Permanent Sub-committee on Investigations'' June 27, 2006, Staff Report and in the House Committee on Energy and Commerce''s hearing in December 2007, which looked into unregulated trading in energy futures.
Both studies concluded that the energy price climb to $128 and beyond is driven by billions of dollars'' worth of oil and natural gas futures contracts being placed on the ICE. Through a convenient regulation exception granted by the George W Bush administration in January 2006, the ICE Futures trading of US energy futures is not regulated by the Commodities Futures Trading Commission (CFTC), even though the ICE Futures US oil contracts are traded in ICE affiliates in the US. And at Enron''s request, the CFTC exempted the over-the-counter oil futures trades in 2000.
So it is no surprise to see in a May 6 report from Reuters that Goldman Sachs announces oil could in fact be on the verge of another "super spike", possibly taking oil as high as $200 a barrel within the next six to 24 months. That headline, "$200 a barrel!" became the major news story on oil for the next two days. How many gullible lemmings followed behind with their money bets?
Arjun Murti, Goldman Sachs'' energy strategist, blamed what he called "blistering" (sic) demand from China and the Middle East, combined with his assertion that the Middle East is nearing its maximum ability to produce more oil. "Peak oil" mythology again helps Wall Street. The degree of unfounded hype reminds one of the self-serving Wall Street hype in 1999-2000 around dot.com stocks or Enron.
In 2001, just before the dot.com crash in the NASDAQ, some Wall Street firms were pushing the sale to the gullible public of stocks that their companies were quietly dumping. Or they were pushing dubious stocks for companies where their affiliated banks had a financial interest. In short, as later came out in Congressional investigations, companies with a vested interest in a certain financial outcome used the media to line their pockets and that of their companies, leaving the public investor holding the bag.
It would be interesting for Congress to subpoena the records of the futures positions of Goldman Sachs and a handful of other major energy futures players to see if they are invested to gain from a further rise in oil to $200, not forgetting that 16 to one leverage with which a hedge fund or bank can buy oil futures.
We are hit with an endless series of plausible arguments for the high price of oil: a "terrorism risk premium", a "blistering" rise in demand of China and India; unrest in the Nigerian oil region; oil pipelines'' blown up in Iraq; possible war with Iran … And above all the hype about peak oil. Oil speculator T Boone Pickens has reportedly raked in a huge profit on oil futures and argues, conveniently, that the world is on the cusp of "peak oil". So does the Houston investment banker and friend of Vice President Dick Cheney, Matt Simmons.
As noted in the June 2006 US Senate report, The Role of Market Speculation in Rising Oil and Gas Prices, "There''s a few hedge fund managers out there who are masters at knowing how to exploit the peak oil theories and hot buttons of supply and demand, and by making bold predictions of shocking price advancements to come they only add more fuel to the bullish fire in a sort of self-fulfilling prophecy."
Will a Democratic Congress act to change the carefully crafted opaque oil futures markets in an election year and risk bursting the bubble? On May 12, the House Energy and Commerce Committee stated it will look at this issue in June.
F William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (PlutoPress), and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (Global Research, available at www.globalresearch.ca). He may be reached at firstname.lastname@example.org.
As food prices spiral, farmers, others profit\r\n\r\nBy JOSHUA FREED and ASHLEY M. HEHER, AP Business Writers Tue May 27, 2:24 PM ET\r\n\r\nWILLMAR, Minn. - The steepest run-ups in food prices since 1990 are hurting grocery shoppers, restaurants and school cafeterias but they''re making others rich.\r\nADVERTISEMENT\r\n\r\nThe winners in the new food economy include crop farmers selling corn and wheat for near-record highs after years of crushingly low prices. Ingredient makers like Cargill and ADM are rife with profits. Fertilizer and tractor companies are cashing in. Hedge funds who made big bets on rising wheat, soy and corn were spectacularly correct. Oil and gas companies, too — it takes natural gas to cook those Wheaties and diesel to haul them around the country.\r\n\r\nTravel along the nation''s food chain and you''ll find some of the biggest profits closest to the land. The nation''s farmers, who raise everything from cows to cucumbers, saw their average household income climb about 7 percent last year to more than $83,000. But in grain-rich states, the results were dramatically higher. In Minnesota alone, the median income for crop farmers soared 80 percent to $95,000.\r\n\r\nThat brings us to Chad Willis.\r\n\r\n___\r\n\r\nWillis raises corn and soy beans on 550 acres near Willmar, some of the nation''s best corn-growing country.\r\n\r\nHe sells his grain nine miles up the road from an ethanol plant he invested in. His family cars are powered by an 85 percent blend of the corn-based fuel. His black and gold-trimmed cap reads "E85 Everywhere." And he knows that grocery shoppers jolted by higher prices for cereal or eggs or chicken think it''s because of ethanol, which consumed 20 percent of last year''s corn crop.\r\n\r\nWillis isn''t saying how much he made last year. While he acknowledges these are good times to be a farmer, he says he''s not pulling in as much as the median income for crop farmers.\r\n\r\n"Most people are excited, yes, but cautious about when things are going to turn around, and how hard it''s going to turn around," he said.\r\n\r\nIn between Willis'' farm and town, the owners of Haug Implement are having some of the best times anyone can remember. The Deere & Co. dealer sells farm tractors that can run to $160,000 or more and combines that can cost $300,000, a major investment even in the best of times.\r\n\r\nNormally Haug would still be taking orders for combines for delivery for the fall harvest. But Deere cut off new orders in mid-November because demand was so high.\r\n\r\nOwner Donald Haug Jr. says it wasn''t long ago that he couldn''t close on new equipment unless he narrowed the gap between trade-in and the sale price to $10,000.\r\n\r\n"We''re seeing some substantial purchasing, and we''re talking over $100,000, and the guy just strokes the check for it," he said.\r\n\r\nThe boom times in farm country have arrived. Corn, soybean, and wheat prices have been pushed at or near record highs by a combination of high demand and new money from hedge fund traders who used to show little interest in those markets. Over the past 20 years, Minneapolis Grain Exchange trading volume has risen almost six-fold to a new record last year. The run-up is because in the frenzied trading the same commodities are changing hands far more than they used to.\r\n\r\n"Grain farmers are making a hell of a lot of money," said Peter Georgantones, president of Investment Trading Services, a commodities brokerage in Bloomington, Minn. "I got grain farmers — a ton of them — who are going to improve their net worth this year — net, now — by a half a million bucks minimum. For one year. That''s a nice gain. Not to mention their land''s worth more."\r\n\r\nNewspapers cover much of the floor in his office and 22 yellow Post-it notes cover much of his desk, where one computer terminal shows nothing but commodity prices. Every few minutes his phone rings with a call from a farmer checking crop prices.\r\n\r\n"These guys, they grow 60, 70, 80 thousand bushels of beans," he said. "I got guys sitting on $2, $3 million worth of grain right now. Farmers are making good money."\r\n\r\nThe International Monetary Fund estimates biofuels accounted for almost half the increase in consumption of major food crops in 2006-2007, saying it has propelled prices for corn, other grains, meat, poultry and dairy.\r\n\r\nOthers dispute that. A report last month from the Agricultural and Food Policy Center at Texas A&M University said higher corn prices have had little to do with rising food costs because other factors, such as rising energy costs, have been at least as important.\r\n\r\nWillis, the farmer near Willmar, is quick to point out that farmers pay much of those profits right back out to their own suppliers.\r\n\r\nThe liquid propane that runs his corn drier cost $1.55 per gallon last year. He''s been told to expect $2 this year. Fertilizer last year ran $115 per acre. This spring it cost double that. He bought 2,500 gallons of diesel fuel for his tractors last year, at a price that started at $2.50 a gallon and rose to $3.09 by the end of the year and has risen further since then.\r\n\r\n"You look at the grain prices, yeah, that''s nice," he said. "But everything''s going up right along with it."\r\n\r\n___\r\n\r\nWhile virtually all businesses are contending with higher energy costs, the rising commodities prices are proving to be bottom-line boosters for other sectors, too.\r\n\r\nProfits at seed and pesticide maker Monsanto Inc. reached nearly $1 billion last year — a 14-fold increase since 2003. They''ve tripled to $1.1 billion at agrichemical maker Syngenta and agriculture divisions of DuPont Co. and Dow Chemical Co. have also seen their earnings balloon.\r\n\r\nCargill, which makes ingredients and trades in commodities markets, boosted its profits to $2.3 billion, up nearly six-fold since 2001.\r\n\r\nMeanwhile, profits at agricultural processor Archer Daniels Midland Co. have more than quadrupled to $2.16 billion during the same period.\r\n\r\nFertilizer makers are winning big, too.\r\n\r\nMosaic Co. saw its third-quarter profits jump tenfold to $520.8 million because strong demand from farmers is giving it power to raise prices.\r\n\r\nCompanies like Deere, the world''s biggest maker of farm machinery, are in the midst of flush times, too.\r\n\r\nBetween 2005 and 2007, Deere''s net profit rose more than 25 percent to $1.8 billion. Meanwhile, operating profits of the Moline, Ill.-based company''s agriculture division rose nearly 50 percent, to $1.4 billion.\r\n\r\n"Everybody is getting their little piece. Everybody wants a piece of the pie," said Lee Richardson, a 37-year-old farmer from Willards, Md., who''s seen the robust profits of his grain harvest consumed by the increasing costs of raising more than 1 million chickens annually on his family''s 2,200-acre farm\r\n\r\nFood prices in the U.S. rose about 4 percent last year, which may not sound like much, but it''s the fastest rate since 1990, according to the Agriculture Department. Prices on some foods rose much faster. White bread prices rose 13 percent last year, bacon 7 percent. Peanut butter jumped 9 percent.\r\n\r\nAnd it''s picking up speed. Food inflation is running at an annualized rate of 6.1 percent as of April, the Bureau of Labor Statistics reported on May 14.\r\n\r\nIn addition, a weakened dollar makes American produce cheap and desirable abroad while weather-wrecked harvests in some foreign countries have generated regional scarcities, increasing global demand for products. At the same time, emerging economies in India and China are creating nations of residents demanding higher-quality ingredients and food.\r\n\r\nThe rising prices are forcing changes at food and ingredient buyers such as Kraft Foods Inc.\r\n\r\nKraft Foods Inc. has seen its commodities costs grow 9 percent, or $1.3 billion. This year, the company expects to see an even bigger input cost increase.\r\n\r\nIt''s raising prices across the board, but the Northfield, Ill.-based food maker is also getting innovative by changing some product packaging to save money. It switched its classic Miracle Whip jar from glass to plastic. The lighter packaging saves Kraft 87,000 gallons of fuel each year, said spokesman Mike Miller.\r\n\r\nEven if this year''s global harvest is robust, shoppers shouldn''t expect big price breaks anytime soon. The USDA said it expects food prices to rise another 4 percent to 5 percent this year.\r\n\r\n"We''re in a new era," said Mike Helmar, director of industry economics at Moody''s Economy.com, "where prices are going to be a bit higher than they were in the past."
The coming grand cycle of commodity bull market\r\nBy Kenneth J Gerbino\r\nWhen you start worrying about your portfolio, please remember these simple data points that make precious metal stocks good investments:\r\n\r\n* Oil is now over $130. Of course there has to be some speculation here, but there are many commodities that are also at sky high prices and these do not trade on exchanges just producer to industrial end user, meaning there are no speculators or hedge funds involved. The list is so long I won’t include it here. The key thing to remember is that if these commodities are also in very strong bull markets it confirms that the general trend in almost all commodities is higher due to economic basics. These basics are: a) the supply demand impact of a new world (China, India, Russia, Brazil, etc.), b) a decade or more of global paper money increases well above normal, creating inflation and c) the normal 20-25 year commodity up cycle that just started in 2001\r\n\r\n* Politicians are out of control and have no intention of dealing with deficits, debt levels or reckless monetary policies. The only solution they understand is more paper money to keep financial and political promises that will be impossible to deliver to the electorates of their countries.\r\n\r\n* One of the smartest and respected Wall Street firms, Bear Stearns went under and was bailed out by the Fed (an unprecedented bailout as the Fed is suppose to deal only with the banking system not investment banks). There are probably more institutions with similar problems that will require more paper money or created credit. Even worse is the fact that if the Fed can bail out Bear Stearns, it gives a green light to Congress to bail out anyone and everyone else in trouble. The Senate Banking Committee just approved such a bailout bill for housing speculators. This will lead to more paper money and more inflation.\r\n\r\n* Gold and silver are commodities and will respond like other commodities in the coming grand cycle commodity bull market. But these metals are also possible currency substitutes that cannot be wiped out by a bank run or a printing press. This will have increased appeal as we move further into more of a paper money crazed world.\r\n\r\nPrecious metal stocks with the resources already in the ground are solid investments. Mining companies with only land packages and drill rigs are highly speculative and will not participate in the coming bull market if they do not find economic deposits (which is very hard to do). Best to put most of your money in companies with solid resources in the ground.\r\n\r\nEconomic Confusion\r\nThe vast majority of establishment money managers are still suffering from intellectual confusions on sound macroeconomic concepts. Most of the people managing trillions of dollars from London to NYC to Tokyo actually think their respective Central Banks and Treasury Departments are doing a decent job by printing money when needed, interfering with exchange rates, and manipulating interest rates by decree and policy.\r\n\r\nThese are insane and unworkable policies. They are also unethical, as these actions rob from the poor working and middle classes and eventually redistribute wealth to the big and the powerful. This is why socialists are still around today.\r\n\r\nSocialists are clueless on economic truths but they look around at the rich getting richer and the poor getting poorer and they question “capitalism” and “free enterprise” because they are too stupid to realize that capitalism and free enterprise have been infected with insane monetary policies and that is why the poor are getting poorer. Their answer - tax the rich and productive, tax the corporations, tax everyone. Paper money policies will promote socialist power in the future. A sad conclusion.\r\n\r\nOur Elite Fed and Treasury at Work\r\nPrinting money creates inflation which lowers the standard of living of every working man. Lowering interest rates artificially makes retirees and savers get 1-2% interest on their hard earned savings when the free market for interest rates should be much higher. They are robbed of economic security and forced to speculate in the stock market or real estate. Exchange rate manipulations create mayhem in global trade. These three government interventions by these powers to the free market are destructive. Free markets are as valuable to mankind as free men and women are to personal happiness.\r\n\r\nThe Worse is Yet to Come\r\nThe main stream establishment money managers who control so much investment capital have no idea what is coming. With inflation coming on stream in the U.S. and elsewhere, interest rates will begin to rise and the stock market will begin to head south. Long term bonds will become bad investments. If a recession develops, then lower productivity and high inflation together will make things even worse. The Fed cannot stop inflation. Once all the new money floating around is in the system prices go up regardless of interest rate hikes.\r\n\r\nWhen these confused Keynesian thinking money managers realize that their economic premises are totally wrong, it will lead them to stampede into the precious metals and the mining stocks. They will be a huge force pushing up prices to levels that will be unreal to even the gold bug crowd.\r\n\r\nValuations of Mining Stocks\r\nMining stocks are dependent on the price of metals for profitability and valuation. We always invest for our clients in companies that have strong growth profiles and low cost production projects which should negate even substantial metal price weaknesses. These are the types of profiles that you should embrace also. Over time, the future cash flow from companies will determine the value assigned to their stock prices.
The coming grand cycle of commodity bull market\r\nWe expect these types of stocks to be more profitable as new mines come on stream. We are still using $550 gold as our baseline for our value expectations. This is a conservative parameter in a world where we also expect gold to go much higher. When doing your homework use a conservative price of gold and then see how the stock’s value pencil’s out. If you can see a cash flow per share multiple of only 5-8 times with $550 gold within a 1-2 year period, you should have a winner (assuming all the other key facts are in order)\r\n\r\nWeekly share price fluctuations have little to do with the final value outcomes of your gold stock portfolio and everything to do with nervous and uninformed investors, traders, brokers and speculators. Given time, good mining projects analyzed properly with conservative parameters usually become very profitable investments.\r\n\r\nThe Writing is on the Wall\r\nIn a world besieged by politicians and central banks that continuously print money and populations that are becoming more and more in debt and dependent on their governments to help them survive, inflation is destined for the future. There is no other way out.\r\n\r\nSince there is some actual global economic progress that will create increases in demand for raw materials, mining stocks should be one of the best sectors to take advantage of these trends.\r\n\r\nWarren Buffet had some wise advice for the recent Berkshire Hathaway annual meeting: “I’m willing to bet the dollar will weaken against other currencies over the longer term”. This sounds logical to me and more reason to own precious metal mining stocks.\r\n\r\nMore Inflation Coming\r\nThe United States imports $2.4 trillion of goods or roughly 17% of our GDP annually. As prices go up in foreign lands, prices of our imports will follow as will our inflation rates. Food shortages and price increases are creating an inflationary future in many parts of the world. According to the United Nations, food riots have erupted in Mexico, Morocco, Uzbekistan, Senegal, Guinea and Mauritania.\r\n\r\nEgypt has banned rice exports to keep the food at home and China has put price controls on meat, grain, milk and eggs. Food inflation in the United States is at its highest level in 30 years. Oil is now over $130 a barrel. It is the end of an era of cheap goods from overseas. Import prices from China have risen in price for 8 consecutive months.\r\n\r\nMining Stocks\r\nThe time for the gold mining stocks is now. A recent Financial Times of London featured editorial was titled, “Gold is the new global currency.” We couldn’t agree more. The article quite correctly concluded that printed money is indeed the barbaric relic. In 2007, the U.S. Government debt increased by $500.2 billion. Even worse news is this recent statement from the U.S. Comptroller General, “The federal government’s fiscal exposure of direct and indirect debt increased by $2 trillion in 2007. Direct and indirect debt obligations totaled approximately $53 trillion as of September, 2007 …. an increase of more than $32 trillion from September 2000.” (Emphasis ours).\r\n\r\nThese are big numbers that make us very secure in holding well thought out gold mining stocks.
China to remain world''s ‘'engine of demand’' for metals, bulk commodities- Moody''s
05.30.08, 5:43 AM ET
BEIJING (XFN-ASIA) - Moody''s Investors Service has a stable outlook on the ratings of base metal, mining and steel companies in the Asia Pacific over the next 12-18 months, and believes China will continue to be the main driver of global metals and bulk commodities demand.
''Despite a stagnant US economy, China should continue to act as the engine of demand that underpins the ratings of metals and bulk commodities, with supporting roles from ongoing infrastructural build-outs in countries like India, Brazil, and Russia,'' the Moody''s (nyse: MCO - news - people ) note said.
It added that China''s growth is likely to be slower than in the past.
''But the combination of production and delivery bottlenecks, tight supply and inventories, higher raw-material costs, and problems with power supplies in certain producing countries will help keep prices well above long-term averages.
Brazilian Oil Finds May Cost $240 Billion to Develop (Update1)
By Joe Carroll
June 5 (Bloomberg) – Brazil''s oil discoveries, including the Western Hemisphere''s largest in three decades, may cost $100 billion more to develop than the industry''s most costly field.
The Tupi deposit and nearby offshore prospects probably will cost $240 billion to exploit, said Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. and a former Royal Dutch Shell Plc exploration manager. The total exceeds the $136 billion estimate for Kazakhstan''s Kashagan field, led by Eni SpA, and would be enough to fund the U.S. space program for 14 years.
Brazil''s state-controlled Petroleo Brasileiro SA will need to enlist international producers such as Exxon Mobil Corp. to raise financing for the platforms and pipelines required to reach crude trapped beneath six miles (10 kilometers) of water and rock, Wells said in a telephone interview. The prospects may hold $6 trillion of petroleum and make Brazil one of the world''s 10 largest oil producers.
``This oil is going to be difficult to get out of the ground and it will cost a lot,'''' said Wells, who also was a chief negotiator for BP Plc in Azerbaijan. Petroleo Brasileiro ``will need the capital expertise only found with the world''s largest, most experienced oil companies.''''
Tupi, the biggest discovery in the Americas since 1976, will start pumping in April 2009, Chief Executive Officer Jose Sergio Gabrielli said in an interview last month. Gabrielli declined to estimate development costs for Tupi and adjacent fields, and a spokesman said yesterday that the company wouldn''t comment on Wells''s projection.
Tupi and Friends
The $240 billion estimate assumes there are four to seven similar prospects nearby and includes costs to drill wells, lay pipelines and build production platforms over a period of about 20 years, Wells said.
Tupi alone could cost $100 billion, said Wells, part of a Neftex team doing a six-year study to map all of the world''s petroleum basins.
Cambridge Energy Research Associates, the Cambridge, Massachusetts-based consulting firm headed by Daniel Yergin, said the Tupi-area fields will cost $200 billion to $240 billion. Costs are rising as producers compete for labor and equipment with oil prices above $120 a barrel. Deepwater drilling rigs are renting for more than $600,000 a day in some cases.
The Brazil fields may hold as much as 50 billion barrels of crude, Wells said. That''s more than the reserves of Libya.
Petrobras preferred shares rose 0.8 percent to 45.62 reais in Sao Paulo trading. The stock has gained 30 percent since Nov. 8, when the company announced the size of the Tupi find. Exxon Mobil Corp.''s shares were little changed in the same period.
Petrobras''s market cap of about $269 billion makes it the world''s seventh-largest company by market value, according to data compiled by Bloomberg.
Petrobras, as Rio de Janeiro-based Petroleo Brasileiro is known, already has leased about 80 percent of the world''s deepest-drilling offshore rigs and plans to hire 14,000 engineers, geologists and drillers within the next three years, Gabrielli said.
The company announced plans last month to place orders with shipbuilders for 40 new drilling rigs and production platforms that will cost about $30 billion.
``Petrobras will probably face stiff challenges in this endeavor, as there are significant hurdles to overcome in terms of acquiring basic materials, people and rig equipment,'''' said Stephen Ellis, an analyst at Morningstar Inc. in Chicago.
Petrobras will revise its $22.5 billion-a-year capital budget because it was drafted before engineers realized the size of Tupi''s recoverable reserves, which may be equivalent to 8 billion barrels of oil, Gabrielli said. At $240 billion, the price tag would be more than the annual economic output of Thailand, Ireland and Malaysia.
The Brazilian discoveries contain about twice as much natural gas in each barrel of crude as reservoirs in the Gulf of Mexico and West Africa, increasing the complexity and expense of the projects, Wells said.
Tupi is about 80 percent crude and 20 percent gas, said Wells, a University of Exeter-trained geologist. For each barrel of oil, there''s 700 to 1,000 cubic feet of gas.
``Gas is an important cost consideration because they have to decide whether to reinject it back into the reservoir or construct a rather large pipeline to take it to another destination where it can be used,'''' said Candida Scott, a senior director at Cambridge Energy Research Associates.
The high wax content of Tupi''s crude and the presence of carbon dioxide, which can damage pipes, also may raise costs, Wells said.
Reading, U.K.-based BG Group Plc, which owns 25 percent stakes in Tupi and an offshore field known as Parati, and 30 percent of Carioca, hasn''t provided cost projections. Carioca, which neighbors Tupi, may hold 33 billion barrels of crude, a Brazilian oil regulator said in April.
``It''s really simply too early to make an estimate of costs,'''' BG spokeswoman Jo Thethi said.
Irving, Texas-based Exxon Mobil plans to begin drilling its first exploratory well off Brazil''s coast in the third quarter.
``It''s a very large area, very difficult to image and it''s going to cost a lot of money to develop,'''' Chief Executive Officer Rex Tillerson told reporters after the company''s May 28 shareholders meeting in Dallas.
To contact the reporter on this story: Joe Carroll in Chicago at email@example.com.
Last Updated: June 5, 2008 10:07 EDT
Farmland Reaps Bonanza for TIAA as Commodities Rise (Update1)
By Brian Louis
June 13 (Bloomberg) – TIAA-CREF, the largest U.S. manager of retirement funds, bought $340 million of farmland in seven states in December. George Washington University plans to earmark $100 million for agricultural investments during the next year.
Farmland is having its biggest revival in almost 30 years as demand for corn and soybeans from Asia and the ethanol industry drive commodity prices to record highs. From Iowa to South Dakota to Wyoming, gains in rural land prices have ranged from 78 percent to more than 200 percent, according to farmers and data from Farm Credit Services of America in Omaha, Nebraska.
Farm values probably will rise at an annual rate of 6 percent to 10 percent in the next five years, said Murray Wise, the chief executive officer of Westchester Group Inc., a Champaign, Illinois-based manager of $550 million of global farm tracts. The median U.S. home is forecast to gain 1.2 percent through 2010 and stay below the 2006 peak of $221,900, the Mortgage Bankers Association in Washington said.
``It''s just crazy out there right now,'''' said Mac Boyd, 65, a real estate broker at Farmers National Co. in Arcola, Illinois, who has sold farms for more than three decades. ``The land market has never been stronger. Never been stronger.''''
College endowments, pension funds and real estate fund managers are buying land even as U.S. homebuilders dump thousands of undeveloped parcels. The five largest home construction companies reported $2.6 billion of land-related writedowns in their most recent quarter.
``There is a real transition from financial assets to real assets,'''' said Don Lindsey, the chief investment officer of George Washington University''s $1.1 billion endowment, in an interview earlier this week. ``Farmland is certainly one of them.''''
Corn prices climbed 80 percent in the past year and soybeans advanced 86 percent. Corn will average $7 a bushel in the year ending Aug. 31, 2009, and rise to an average of $8 a bushel in 2010, Morgan Stanley said in a report published last month. Corn futures for July delivery rose 5.75 cents to $7.09 a bushel yesterday on the Chicago Board of Trade.
Westchester Group bought a 2,150-acre farm in December southwest of Springfield, Illinois, when farmland went for $5,000 to $6,000 an acre, said Randall Pope, the company''s president. Now the market is at $6,500 to $7,000 an acre, he said.
``There''s no shortage of potential buyers,'''' Pope said. ``That causes pretty intense competition when something comes on the market.''''
Hancock Agricultural Investment Group, a unit of Toronto- based Manulife Financial Corp., has $940 million of farmland holdings and commitments from pension funds and other institutional investors. Hancock posted an annualized total return of 12.3 percent over 10 years, according to the company''s Web site.
The farmland holdings of UBS AgriVest LLC have had annualized gains of 11 percent since 1991, according to the company''s Web site. It has $172 million of assets with 66,514 acres of land under management. UBS AgriVest is part of Zurich- based UBS AG, the European bank hardest hit by the collapse of the subprime mortgage market in the U.S.
``We get calls on a pretty regular basis from people looking for land,'''' said Allan Worrell, an owner of Worrell-Leka & Associates Land Services LLC in Jacksonville, Illinois. ``While there are no guarantees of future appreciation, historically it has had appreciation.''''
Teachers Retirement System of Illinois sold its agricultural land to TIAA-CREF in December for about $340 million, said Eva Goltermann, a spokeswoman for the Illinois teachers retirement system. The portfolio included land for growing oranges, almonds, apples and corn, Goltermann said.
``This portfolio was attractive to TIAA-CREF as it adds a high-quality, well-managed and well-diversified agriculture exposure to TIAA-CREF''s portfolio,'''' Abby Cohen, a TIAA-CREF spokeswoman, said in an e-mail. ``High-quality investments in alternative asset classes are one way TIAA-CREF seeks to deliver consistent long-term growth for our investors.''''
The average value of farmland has jumped by 220 percent in South Dakota and by 123 percent in Iowa during the past 10 years, according to a survey of benchmark farms conducted by Farm Credit Services of America. Values rose 78 percent in Nebraska and 118 percent in Wyoming.
`Hungry to Buy''
Prices in Iowa increased 22 percent last year to a record $3,908 an acre, according to data compiled by Iowa State University Extension in Ames.
The surge in prices means the best investments may now be in Latin America, Eastern Europe and Australia, said Lindsey of George Washington University in Washington.
``There''s a strong likelihood that institutional investors will end up bidding up the price of farmland in the U.S.,'''' he said.
Wiltsie Cretsinger, 49, of Coon Rapids, Iowa, has seen the value of his 633 acres rise 200 percent in the past 10 years, outstripping the 22 percent return of the Standard & Poor''s 500 Index.
His land is now worth about $1.8 million and he''s not looking to sell. If prices fall, then ``I''m going to be hungry to buy'''' more land, he said.
The last time farmland generated these kinds of returns was in the 1970s and early 1980s when grain exports surged to countries such as the former Soviet Union. Rising grain prices prompted farmers to take on debt to buy more farmland.
Then, lending rates climbed and farmers couldn''t cover their ``high debt levels,'''' said Darrel Good, a professor of agricultural economics at the University of Illinois at Urbana- Champaign. Farms went into foreclosure and the crisis in rural areas led to the first Farm Aid concert in 1985, organized by musicians Willie Nelson, Neil Young and John Mellencamp.
Farmland prices plunged as much as 75 percent in the mid- 1980s, said Randy Hertz of Hertz Farm Management Inc. and Hertz Real Estate Services in Nevada, Iowa. An index of Indiana farm values compiled by Purdue University fell 56 percent from 1981 through 1987.
It took 15 years for land prices to recover, said Good of the University of Illinois.
Now global economic growth and the booming ethanol market are driving the gains. Demand for corn to feed livestock jumped 24 percent in the past decade as growth boosted personal incomes and meat consumption in developing countries.
Ethanol is a component of President George W. Bush''s plan to reduce the country''s dependence on oil. Corn is the primary feedstock for ethanol production in the U.S., which increased more than 220 percent since March 2003.
Glenn Kreuder, 48, a farmer and investor in Garden Grove, Iowa, sold 70 acres of land in Wayne County, Iowa, for about $4,000 an acre. He held the land for about two years.
``It probably almost doubled in that period of time,'''' said Kreuder, who farms about 800 acres of land in Iowa, and has also bought and sold land in Illinois.
George Washington University''s endowment has allocated about half of its planned $100 million investment in farmland, Lindsey said. So far, none of the money has been invested in the U.S., though it has committed to a fund run by UBS AgriVest that will buy U.S. real estate, he said.
To contact the reporter on this story: Brian Louis in Chicago at firstname.lastname@example.org.
Myra Saefong''s Commodities Corner\r\nInflation has yet to hit the vital water market\r\nBut shortages, rising demand could accelerate prices, analysts say\r\nBy Myra P. Saefong, MarketWatch\r\nLast update: 11:17 a.m. EDT June 13, 2008\r\nComments: 48\r\nSAN FRANCISCO (MarketWatch) – Water is similar to what oil is or once was – undervalued and taken for granted, and consumers could soon pay a real price for it.\r\nAnalysts say increased demand for clean water has been driving up the cost, bad news for a world already concerned about rising food prices. Agriculture is the world''s top water user, accounting for an estimated 70% of total global consumption.\r\nThe world''s scarcity of clean water is widely known, yet it''s still one of the cheapest commodities in the world.\r\n"Water is so under the radar that cheap doesn''t even begin to describe it," said Kevin Kerr, editor of MarketWatch''s Global Resources Trader. "But one day soon, we will realize that it is one of the most important commodities and quickly becoming one of the scarcest."\r\nTap water costs less than a penny per gallon, according to the American Water Works Association. Compare that with the more than $4-a-gallon price for gasoline.\r\n''Water is so under the radar that cheap doesn''t even begin to describe it.''\r\n— Kevin Kerr, Global Resources Trader\r\n"Water is a valuable natural resource and the demand for it is not elastic," said Sean Brodrick, a natural resources analyst for MoneyandMarkets.com. "As prices rise, consumption does not decrease" so investors should see steady price acceleration as demand climbs, he said in a recent report.\r\nThe use of renewable water resources around the world grew sixfold in the 20th century, though global population tripled, according to the World Water Council.\r\nThe water situation is "an emerging crisis – one unfolding right now," said Chris Mayer, editor of Capital & Crisis, a financial newsletter that has covered the water crisis since 2005.\r\nBoth oil and water are "critical to the economy and to our standard of living," he said. "Water, obviously, more so."\r\n"With water, we''ve long enjoyed cheap water whenever we want it," Mayer said. People took it for granted too and the water infrastructure "got old and demand is pushing hard now," he said.\r\nSo, just like oil, water is playing catch up. The problems are fixable, but it''s going to take time and money and "proper market-based incentives to use water more intelligently," he said. "That means higher water prices."\r\nRights to water\r\nMunicipal water rates have climbed by an average of 58% in Canada, 50% in South Africa, and 27% in the U.S., according to an Earth Policy Institute report issued last year. In a survey of 14 countries, average municipal water prices ranged from 66 cents per cubic meter in the U.S. up to $2.25 in Demark and Germany, it said.\r\nBut consumers don''t usually pay the actual cost of the water, as many governments practically give water away through subsidies, according to the report.\r\n"Prices vary enormously from place to place, and for different kinds of water use," said Peter Gleick, president of Pacific Institute, an independent think-tank based in Oakland, Calif. "It is most heavily subsidized, typically, in agriculture."\r\nPricing for water rights in the Middle Rio Grande in New Mexico, in particular, about doubled between 1997 and 2005, according to data complied by Sustainability of semi-Arid Hydrology and Riparian Areas and Agora Financial.\r\nTexas oil man and billionaire investor T. Boone Pickens recognized the importance of water access in 1999 when he, along with a group of landowners, formed Mesa Water, a company that can sell water to communities that don''t have enough.\r\nIn the western U.S., water is allocated on a "first come, first serve" or a "first use, first in right" basis, said Gleick. That means some farmers have very reliable water supplies, even in a drought, but others "get cut off" when there isn''t enough to go around.\r\n"If water rights are guaranteed, it is very hard to take them away from them," he said.
Inflation has yet to hit the vital water market\r\nThe answer to whether water''s obvious tie to crops will help make the food sector fall deeper into a crisis of rising prices isn''t an easy yes.\r\nOne thing''s for sure, "agriculture has had it easy when it comes to water," said Mayer. "That will change soon."\r\nDemand for corn to create ethanol has helped lift corn prices to their highest levels ever. "Demand for corn at ethanol plants is huge, but demand for water for ethanol plants is even bigger," said Kerr, who is also president of Kerr Trading International. See Food Futures.\r\nEthanol is very water intensive, said Mayer. "A typical ethanol facility will need 500 gallons of water per minute to produce 50 million gallons of biofuel a year," he said. See related story.\r\nCrops like corn and soybeans require nearly twice as much water as wheat, said Mayer.\r\nSo droughts can reduce the global harvest and the water crisis can "naturally feed inflation," said MoneyandMarket.com''s Brodrick.\r\nBut farmers can shift to less water-intensive crops to save water, and they can also use water far more efficiently to grow food, according to Gleick.\r\n"Shifting from flood irrigation to precision sprinklers, or from sprinklers to drip, can lead to reductions in water use and increases in production," he said.\r\nMechanized irrigation is 95% efficient, allowing almost all of the water to fall on crops that need it, while gravity or furrow irrigation is only 60% to 80% efficient, Mayer said. Nearly half of the irrigation in the U.S. is not mechanized, he said.\r\nBut if "it comes to a crisis mode between crops and people," someone will figure out how to tap the water supply from the ocean with desalination plants on a large scale," said Darrell Jobman, editor in chief of TradingEducation.com.\r\nThat would result in the need for more research and money – and people would have to pay much more for water, he said. Eventually, that could mean some kind of futures contract for water. See archived story on prospect for water futures.\r\nLacking incentive\r\nBut if farmers enjoy subsidized water, they won''t have much incentive to use water more efficiently, said Mayer.\r\nAnd cheap water means that investment in water assets is less than it otherwise would be, which in turn means supply is tighter than it needs be and demand is greater than it would be, he said. "Without a market mechanism setting the prices, you have irrational pricing."\r\n"Proper pricing of water encourages proper use of water," said Gleick.\r\nAnd with expectations for higher water prices come prospects for investment.\r\n''If you''re thirsty for profits, consider investing in good ol'' H20.''\r\n— Sean Brodrick, MoneyandMarkets.com\r\n"As water prices rise, there is a mighty river of profits, just waiting to be tapped," said Brodrick.\r\nBuying stock in companies that make bottled water is a good option. PepsiCo (PEP:\r\nPepsiCo, Inc\r\nNews, chart, profile, more\r\n Last: 67.54-0.41-0.60%\r\n4:02pm 06/13/2008\r\nDelayed quote data\r\nAdd to portfolio\r\nAnalyst\r\nCreate alert\r\nInsider\r\nDiscuss\r\nFinancials\r\nSponsored by:\r\nPEP 67.54, -0.41, -0.6%) and Coca-Cola (KO:\r\nThe Coca-Cola Company\r\nNews, chart, profile, more\r\n Last: 55.42-1.72-3.01%\r\n4:01pm 06/13/2008\r\nDelayed quote data\r\nAdd to portfolio\r\nAnalyst\r\nCreate alert\r\nInsider\r\nDiscuss\r\nFinancials\r\nSponsored by:\r\nKO 55.42, -1.72, -3.0%) are a means to "ride a potential rising tide of bottle water sales," he said. U.S. consumers now drink more bottle water than any other beverage, except carbonated soft drinks, according to the Earth Policy Institute.\r\nAnd there are water exchange-traded funds, such as PowerShares Water Resources Portfolio (PHO:\r\nPowerShares Water Resources Portfolio\r\nNews, chart, profile, more\r\n Last: 22.43+0.49+2.23%\r\n4:16pm 06/13/2008\r\nDelayed quote data\r\nAdd to portfolio\r\nAnalyst\r\nCreate alert\r\nInsider\r\nDiscuss\r\nFinancials\r\nSponsored by:\r\nPHO 22.43, +0.49, +2.2%) , which hold a basket of stocks of companies involved in the production, treatment and distribution of water, said Brodrick.\r\n"If you''re thirsty for profits, consider investing in good ol'' H20," he said.
Russia''s economy grows by 8.5% in first quarter
By Polya Lesova, MarketWatch
Last update: 2:06 p.m. EDT June 16, 2008
NEW YORK (MarketWatch) – Russia''s economy expanded by 8.5% in the first quarter, exceeding market expectations as soaring commodity prices and domestic demand boosted growth in the resource-rich country.
First-quarter growth in Russia, which boasts one of the best performing emerging equity markets, surpassed market expectations of 8%. However, the figure marked a slowdown from the 9.5% growth rate Russia posted in the fourth quarter of 2007.
"The Street has consistently underestimated Russian GDP over the last three to four years," said Julian Mayo, co-manager of U.S. Global Investors Eastern European Fund (EUROX:
US Glbl:East European
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EUROX 15.61, +0.01, +0.1%) .
"The Russian economy is extremely strong," Mayo said. "People are scrambling to upgrade their commodity-price forecasts. Domestic demand remains very strong."
Chart of RSX
In New York, the Market Vectors-Russia ETF (RSX:
market vectors etf tr russia etf
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RSX 55.72, +0.25, +0.5%) rose 0.8% at $55.92.
In Moscow, the benchmark RTS stock index closed up 0.4%. The index is up 3.3% this year, making it one of the best performers among emerging markets.
Russia''s stock market is dominated by oil and gas stocks, reflecting the fact that the country is a big exporter of many commodities – including oil, natural gas, and metals – prices of which have surged in recent months. The price of oil, for example, hit a record high of $139.89 a barrel early Monday.
For the resource-driven Russian economy, soaring commodity prices have been a bonanza.
"It''s not a very surprising figure given the kind of prices Russia''s key commodity and energy exports are commanding at the moment," said Cameron Brandt, global markets analyst at EPFR Global, commenting on Russia''s first-quarter GDP growth.
"Russia has definitely been viewed as a more attractive destination this year for a number of reasons," Brandt said.
Among those reasons are attractive valuations, a relatively smooth political transition and strength in commodity prices, he said. Dmitry Medvedev succeeded his mentor Vladimir Putin as Russian president in early May.
Net inflows into Russia country funds tracked by EPFR Global have totaled $2.8 billion this year.
Mayo, whose fund invests heavily in Russia, said that he''s optimistic both about the commodity and domestic-demand aspects of the Russian economy.
"The market is still relatively attractively valued," Mayo said, adding that equities there are currently trading at a price/earnings ratio of about 11, which makes them among the cheapest emerging markets.
Russia''s inflation on the rise
While Russia''s economy is growing at a fast pace, its inflation rate is also surging.
"The flip side of a strong economy would be rising inflation," Mayo said. "Inflation is coming from commodity prices, which Russia exports."
Russia is currently struggling with 15% inflation, the highest rate among the so-called BRIC countries - Brazil, Russia, India, and China. Last week, the central bank raised interest rates in an attempt to curb surging inflation.
While Russia exports many commodities, it is a net food importer and global food prices have risen steeply in recent months. Food prices account for more than 30% of the consumer price index basket in Russia.
"In the short run, it''s manageable," Brandt said. "In the long term, it poses a considerable threat to Medvedev''s promises to steer Russia towards a more market-based system. Inflation is really hurting a lot of people who depend on the state."
Besides raising interest rates, policymakers sometimes fight rising inflation through currency appreciation. Russia, however, like many emerging markets, has opted to keep the ruble fairly cheap in order to sustain export-driven growth. End of Story
Polya Lesova is a MarketWatch reporter based in New York.