George Lee, manager of the CF Eclectica Agriculture fund, answers questions from Tomas Hirst.
Q. Which companies and regions does Eclectica predict will have the greatest growth in terms of share price in 2008? A.
A.In the short term, you would look at US fertiliser stocks and some of the Brazilian sugar stocks. Some of the Australian stocks have been pushed up and something could emerge from that.
Q. What will be the main upward pressures on the price of agricultural commodities over the coming year? A.
A.Prices will increase due to a combination of population growth, rising incomes and the production needs of the whole biofuels industry. For 35 years the prices have been going down in real terms and in that environment no one invests in the commodities.
Q. What was behind the 5% tax on corn, rice and soyabean exports and a 20% levy on wheat by China? A.
A.It is mainly a consequence of food price inflation. If you take food there as a percentage of CPI [Consumer Price Index], whereas in the US and the UK it would only be around 15% over there [China] it’s more like 30%. So when you have a situation where China has been exporting deflation to the rest of the world and competing on the basis of cheaper labour costs, the food prices start rising for consumers more quickly than they would in the UK. The government needs to control these price rises. One way to do this is to ensure that exporters can’t export agricultural commodities onto the world market to ensure food supplies domestically, which is what they are doing.
Q. Stavros Dimas, the EU environment commissioner, and Britain’s Royal Society have suggested that biofuels may cause more problems than originally considered. What impact is this likely to have on demand for crops for conversion into biofuels? A.
A.I think the environmental justifications for biofuel production have been an excuse rather than the main reason for the interest in biofuels. I believe the main reason for it is that with the oil price rising from $10 a barrel to $100, if you are a big importer of oil such as the EU it makes economic sense to try to look for other sources of fuel.
If we take the US targets as an example they want their production of fuel from ethanol to increase roughly four times from the 2008 level by 2022. I don’t think this is going to happen. Those targets will be gradually taken down owing to a combination of higher prices of agricultural products and a stronger reaction from the environmental lobby.
Q. Are fears of extreme weather conditions playing a part in promoting market pessimism over the possibility of increasing crop yields? A.
A.I don’t think it has had a big impact so far. Improvements in technology will help to mitigate the effects of extreme weather conditions. Innovations such as drought-resistant corn may help to diminish the importance of bad weather.
Q. Will the market be hit by measures taken by governments, such as the price freeze in Russia, to control commodities prices to avert protests such as those over pasta prices in Italy and the tortilla riots in Mexico? A.
A.Any efforts to control price rises are going to affect the profits of producers negatively. In Russia what’s interesting is that [President Vladimir] Putin is putting a lot of effort into improving the growth of the domestic food industry. So at the moment a lot of measures are being taken to encourage and support domestic producers.
Q. Eclectica described agricultural commodities as a ‘bubble-like opportunity’. Does this mean that you expect the bubble to burst at some point? A.
A.We are nowhere near bubble territory yet, but what we are saying is that it has the potential to be a bubble. The time to start worrying about agriculture being a bubble is when you see corn going as high as $20 a bushel. In this bull market the price of oil has gone up 10 times, copper has gone up eight times, but the price of corn has only doubled. People get very excited because the wheat price has gone up a bit but it is probably going to go up two or three times more.
Q. With the turmoil in financial markets how is this likely to affect the fund and how closely are agricultural commodities and equities correlated? A.
A.Equities and agricultural commodities are not strongly correlated. In the short term we are correlated because we are investing in agricultural equities. Owing to market turbulence people are selling their agricultural stocks along with everything else. Over a two, three or four-year period, however, I suggest that our fund would do very well whatever happens in the stockmarket.
George Lee is a partner at Eclectica Asset Management. He took over joint responsibility of the CF Eclectica European Equity fund in September 2006 and the newly launched CF Eclectica Agriculture Fund from June 2007. Lee joined Hugh Hendry at Eclectica in 2005 from Odey Asset Management, where he trained as an analyst under Hendry.