Commods investors wary amid grain glut

Abundant supplies of corn and soybeans, a glut of corn-based ethanol, fluctuations in the value of the dollar and uncertainty over whether and when the U.S. government will increase allowances and incentives for ethanol use are among the factors taking the shine off U.S. commodity investments.

"We're starting out the year -- both January and February -- with funds ... essentially in the red. (They) are not experiencing the early euphoria on returns that they did early last year," said Rich Feltes, senior vice president of MF Global Research, during a discussion at the summit in Chicago.

Feltes said February saw a net outflow of capital from commodities, led by metals investors.

Dan Basse, president of consultancy AgResource Co in Chicago, told the round-table that a persisting world grain glut was weighing on the minds of investors. Without major problems facing the spring planting season for U.S. corn and soybeans, that grain glut should grow.

"We don't have any shortages today of global grains or oilseeds," said Basse. "As we move into a new growing season we almost do need a weather problem if you want to get overly excited."

ETHANOL MOVE MAY BE TURNING POINT

Basse said diminished demand for corn ethanol was another key factor.

"Instead of seeing 700 (million) to a billion bushels of new corn ethanol demand coming on every year you're now looking at 200 (million) to 300 million bushels going forward," he said.

Demand should improve if the government moves forward with a proposed blending increase to boost the level of ethanol allowed in gasoline to 15 percent from 10 percent. Basse and other analysts were looking for a decision by mid- to late-summer.

Increasing demand for ethanol down the line will help draw down some corn supplies, but won't address overall concerns, said Basse.

"The theme here is one that we're still in the cyclical nature of agriculture," he said. "And we're in a more bearish supply trend than we've seen, at least going back to the middle of last decade."

Advanced Economic Solutions President Bill Lapp said ethanol was currently priced at a 60 cent discount per gallon to the price of wholesale gasoline, but the pending decision had "looming bullish potential."

"Everybody will be able to water down their scotch and will probably use a lot more ethanol," Lapp said.

Not all saw commodities as unappealing. Agrium CEO Mike Wilson told the Reuters summit that he remained bullish on commodities.

"All commodities look pretty good today, the question is have they run up a lot?"

"When I look at commodities, I try to look at a high demand of supply-demand fundamentals, and then I try to say, 'Are you relying only on China?'"

"If you're relying on China to be the savior of your future, look out. Because China can turn off the tap just as quickly as it can turn it on," Wilson said.

source: reuters