Commodi-tastrophe 2010: No Shortage of Shortages

Last year, commodities wizards donned their magical robes and entered nebulous mantic states, conjuring dark visions of commodity shortages for 2010. And they were right—though maybe not for all the right reasons.

In one prescient analysis from last year, Goldman Sachs described a scenario in which recovery from the GFC would lead to increased commodity demand in a period when inadequate capital would available to increase supplies.

Indeed, Goldman itself has been blamed for index trading activity that profited and perhaps drove some shortages since then, and the firm was at pains last month to rebut such arguments.

In any case, some materials have become quite scarce. Russia stirred grain markets by announcing an embargo on wheat exports. While this choice was not surprising, no one foresaw the holocaust that would spread across Russia, destroying crops and anything in its way.

Likewise, few were aware that a shortage of wagons in India would strand millions of pounds of sugar in ports in India, according to Bloomberg.

Now concerns with wheat have spread to corn markets, and a possible grain shortage could juice up prices for not only food but beer as well.

Industrial commodity users have been stepping up in the hedging department in recent months, according to The Financial Times, but it remains unknown whether players are locking in prices for long enough:

Even so, bankers say that the length of the hedges in the food industry is shorter than in other industries, such as energy or metals, where companies lock in prices up to 10 years ahead. As supplies of agricultural commodities vary each year depending on the weather, plant diseases and planting, companies are reluctant to lock in prices beyond 12-18 months.

The United Nations has sought to allay fears of major food shortages. But prices of commodities behind many basic foodstuffs have gone up substantially, and consumers generally are not in a position to hedge against price increases.

Analysis in The Independent suggests the U.K. can navigate commodity prices and manage inflationary pressures, but not without some damage to the little guy:

But the scale of the wheat-price hike, at almost 100 per cent in two months, seems sure to feed through to the price level and raise the cost of living. In poorer nations the hardship is likely to be more acute, as a much higher percentage of household budgets are accounted for by basic food staples. In 2008 a rapid escalation in prices and food shortages sparked riots from Mexico to Indonesia.

Traders are left wondering how to play potential rises in consumer prices. Analysis from banks like Goldman can provide ideas on specific stocks and other plays involving derivatives and credit.

Commodity ETFs seem like a good choice for those reluctant to play in futures markets, but some of these ETFs have had trouble rolling over futures positions without incurring costs big enough to undermine tracking.

One new development there is a new ETF from United States Commoditiies Funds, the United States Commodity Index Fund (USCI). Some commodity funds have had serius trouble managing the recent two years of deep contango in futures markets. However, according to IndexUniverse, the USCI fund (which will follow the SummerHaven Dynamic Commodity Index), will reduce expensive roll costs by investing in a range of contract series spread across time:

The new fund is U.S. Commodity Funds’ latest effort to address contango-related problems with its products. For example, to complement its natural gas ETF (UNG), it rolled out a sister natural gas fund (UNL) that tracks 12 successive futures contracts instead of UNG’s single contract, which makes it particularly vulnerable to contango.

If more ETFs and employers of commodity hedges change their terms structures like this, mere mortals may have a better chance of keeping up with commodity price movements.

Image from Photos8

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