Thursday, June 5, 2008

Hedge Funds on the Farm

The NYT has another article today about something I've been exploring (they actually mention the Ospraie Special Opportunity Fund whose letter I was just reading) -- hedge funds that have commitments both on the financial and physical side of the commodities markets. Naked Capitalism has some skeptical thoughts, as are certainly warranted. It's honestly very difficult to tell whether this is a good place to make money now or not. Clearly, the volatility of the commodities markets and the fact that pension funds keep piling into the long side of the futures market creates an opportunity here. And everybody knows about it, which sounds the contrarian alarm bells (inevitably before it should for me, but one can defend this paranoia as a capital preservation mechanism).

It's hard even to come to a firm conclusion as to what assumptions are necessary to make money here. I don't expect oil or grain prices to stay at the level they are at forever. But simply recognizing that misses the point. Over the long-term the world is going to need more food. And they're going to get it. The question is whether the appropriate medium-term increase is already completely in the pipeline, or whether it's still possible to profitably become the agent of this increased production. What's the time scale on it, and where do food prices need to be to make money over the next 5 years? Another valid question is the exit strategy. If you buy land in the Ukraine to produce wheat, you make make a great profit over the next few years, but then be stuck with a bunch of land for producing wheat at exactly the moment there's too much wheat around. This might make it very difficult to liquidate the fund.

The thing that attracts me to these special opportunities commodity funds that are buying things like grain elevators is that you may be able to hedge out some of these questions, and make a profit regardless.

No comments: