HardAssetsInvestor

Written by Lara Crigger  |

March 12, 2010

Tom Fernandes: Going Long On Agriculture

Details

The manager of operations for the GreenHaven Continuous Commodity Index Fund shares his insights on the ag space.

• Why current stockpiles make wheat the ‘stepchild of grains’
• How farmland is a contrarian play
• Why generic seeds aren’t  such a great deal

 

With China canceling U.S. soybean shipments, and national corn and wheat stockpiles hitting all-time highs, the fundamentals are looking dicey in the ag markets right now. But there are still opportunities to be found, says Tom Fernandes, director of operations for GreenHaven, LLC.

An expert in commodity futures, Fernandes works for the Grain Service Corporation and is the manager of operations for the GreenHaven Continuous Commodity Index Fund (NYSE Arca: GCC), an equally weighted, long-only commodities index ETF.

Recently, HAI associate editor Lara Crigger chatted with Fernandes about his outlook for grains in 2010, including what's behind the current grain stockpiles, why farmland makes a smart contrarian play and why generic seeds aren't as good an idea as they might sound.

 

Crigger: With un-encouraging export data coming out of the ag space, is 2010 going to be a down year for the big three—wheat, corn and soybeans?

Fernandes: What's interesting about the export data in grains is that although the shift between soybeans, wheat and corn happens based on demand and substitution, the actual infrastructure that allows the exporting of grains is limited in some fashion. We work pretty regularly on the hedging side with some of the folks who ship grain down the Mississippi River via barge, and if you look at their numbers over a 10-year period, they're pretty steady. As of 2005, the largest export terminal for corn has been running 24/7; it doesn't really have any additional capacity.

In '06, '07, and early '08, we had a huge overflow of grain exports going out in export containers, or those containers that you see in a shipyard that get put onto an 18-wheeler and deliver goods to Wal-Mart. Folks have figured out: They need to get back to Asia, so they filled them up with corn and shipped them back. It was a cheap round trip and return, and it actually competed with the Panamex. A lot of exports went out that way and helped bolster the basis for the physical price of the grains. But as the U.S. demand for Asian goods fell, the supply of containers sat empty; you actually had less of a transportation means to get them out there.

So I don't think there's any super catalyst on the export side in 2010 that's going to push prices higher. But as the economy improves, and as long as this "cheap round-trip shipping" exists, those commodities become more attractive to foreign buyers.

There are two developments we think will happen, although probably not in 2010; they're probably more 2011 events. First, there's a really large export terminal being built in the Pacific Northwest by some grain companies, and when completed, that can be a big catalyst for soybean exports. Second, it's our opinion that the Chinese yuan is maybe poised for some kind of re-peg, which would make U.S. beans more attractive than perhaps Brazilian beans.

Crigger: Interesting you say that, since earlier in the week, we saw China cancel orders for over 192,000 tons of soybeans from the U.S. in favor of Brazilian ones.

Fernandes: The U.S. dollar has actually made a pretty strong move off its bottom over the past 10-15 weeks. The dollar—which the yuan is tied to—has been weakening versus the Brazilian currency, which made beans more attractive from the U.S. But now the dollar's made a reverse course.

It's our contention that if and when the Chinese currency revalues against the U.S. dollar, it's actually going to have more purchasing power buying the U.S. beans over Brazilian.