As commodities fall, some investors see reasons to buy

A FEW brave investors are betting the gloom oppressing global commodity markets is on the verge of lifting.

US farmers are planting less cotton after prices tumbled 28 per cent last year

A FEW brave investors are betting the gloom oppressing global commodity markets is on the verge of lifting.

The world’s farmers, mining companies and oil producers spent billions of dollars over the last decade to increase output. The result: huge surpluses and sharply lower prices for commodities ranging from oil to sugar to iron ore.

The magnitude of the decline has exceeded the expectations of most investors and analysts. The Bloomberg Commodity Index, tracking 22 commodities, fell for a fourth straight year in 2014 and is down 3.1 per cent this year.

But some investors see the seeds of a recovery in daily reports of plunging prices. They are buying some of the hardest-hit commodities, in a bet that low prices will quickly force producers to cut back, erasing the global surpluses behind the slide.

Many of these money managers acknowledge that a rebound may still be months off but say they are willing to endure short-term losses rather than miss an opportunity to get in early on the next rally.

“I don’t think commodities will go down much more,” said Christopher Burton, portfolio manager at Credit Suisse Asset Management’s commodities group. “We … are positioned for a bullish move in commodities.”

Mr Burton has bigger exposure to diesel and copper than his benchmarks outline, as he said he expects prices to rebound this quarter. Copper and diesel are both down about 11 per cent in 2015.

Last year typified commodities’ recent struggles. The Bloomberg Commodity Index ended 2014 down 17 per cent at a 5½-year low. Many commodities have extended losses in the new year. US oil prices dropped below $US45 a barrel for the first time since April 2009 and copper prices have reached a 5½-year low.

Despite record supplies, investors are hanging on to bullish bets in some markets that declined steeply in recent years, including corn and soybeans, according to data from the Commodity ­Futures Trading Commission. Many investors see agricultural commodities bouncing back fastest because farmers can adjust the size of their crops from season to season. Growers watch futures prices right up until the start of the planting season. If they ratchet back the number of hectares ­devoted to a crop, global supplies can fall in a matter of months, sending prices soaring.

In Brazil, the world’s top sugar producer, dozens of sugar-cane processors have closed or been idled by their owners over the past few seasons as prices slumped. The price of sugar fell for a fourth consecutive year in 2014 but is up 4.5 per cent this year. Growers have been planting less cane, and some of the mills that stayed open are running below capacity.

That is likely to result in global sugar production falling below demand for the first time in five years, according to estimates from Rabobank. The bank expects prices to reach US35c a kilo this year, up from US29c at the end of 2014. US farmers are also changing course. The US Department of Agriculture predicts the land US farmers devote to corn will drop slightly to 36 million hectares this year.

Prices for cotton tumbled 28 per cent last year to $US1.21 a kilo. The USDA said farmers would likely cut back this (northern) spring, leading to a production decline of 13 per cent.

In the futures market, some investors are even buying oil and petroleum products, among the commodities in the Bloomberg index that fell the most last year.

While many analysts expect supplies of oil to keep ballooning, suppressing prices, some investors are betting on a bounce as ­demand hits records in big ­importers like China and oil companies slash budgets.

About half the world’s oil isn’t economical to produce when prices are below $US50 a barrel, Nomura Securities said in a recent note. “We’re at price levels where you’re seeing a lack of interest in reinvesting” by producers, said Jonathan Berland, senior managing director at Gresham Investment Management, which specialises in commodities.

Still, some commodities prices may remain depressed for some time. Some mining firms and drillers are reluctant to shut down mines and oil wells that can be expensive to restart. Many companies borrowed to fund expansion during the boom years and must keep producing at high rates to pay off debt. And of course, there were plenty of investors who bought commodities on the dips in the last couple of years and got burned when prices kept falling.

WSJ