Jim Rogers thinks Warren Buffett is wrong about commodities

[EJ]

What do you think?

[ChessMan]

I am not sure that sugar, corn, wheat are going to go up in price, but I'm ready to be convinced.

My concern is that the famer lobby groups in America, Europe, even here in Canada, are very powerful. The respective governments subsidize agriculture, and that will never stop. Therefore, there's a chronic overproduction of agricultural goods.

I haven't seen this concern addressed by any commodity bull yet.

[MLM]

I don't buy the idea that commodity prices won't fall if the U.S. has a significant recession. Recessions (http://www.nber.org/cycles.html) cut demand for oil (http://www.eia.doe.gov/emeu/aer/pdf/pages/sec11_21.pdf), and other commodities.

I guess you can imagine a scenario where domestic demand in China compensates for a drop in demand from the U.S. But, the odds of things actually working out that way are slim. If marginal demand for Chinese goods and oil in the U.S. goes down and supply stays the same, prices are going to drop.

[EJ]

Rogers doesn't claim that demand doesn't fall in a recession. He claims that a demand/supply disequalibrium creates the inflation that causes the recession. Demand falls but the costs of production rise faster. Commodity prices rise. He doesn't say at what point commodity prices in the cycle are rising in real vs inflation adjusted terms, but who cares? Everything else that's dependent on low interest rates is going down in both real and inflation adjusted terms. The movie has played twice last century. Coming to an indebted nation run by a fiscally dysfunctional Congress near you.

I recommend you read his book.

Oh, and get us some free energy. We ain't got forever, ya know. Tick, tock. Tick, tock.

[BK]

Rogers makes a lot of sense .

A. Farming takes a lot of oil - especially the farm produce we get from far- far away.. Remember, when you were a kid and cocanuts- and pineapples were a VERY special treat.

Ben B is on record as preferring to Print Money than to allow a deflation economic conditions. That leads you to believe that the Fed will pull out all stops to prevent deflation - leaving stagflation - and inflation. A US Dollar will buy less and less from the outside the US.

So, the cost of filling the diesel tractor, the cost of the petro based fertilizer, the cost of the trucking (distribution), the cost of keeping produce cool on its 1500 mile trip to the consumer, all these costs will increase.

Perhaps farm land in the Northeast will become more valuable as farm land than as tract housing?

[mtnrunner2]

I checked in to buying the Rogers Commodity Index Fund a couple weeks ago, but at that time, it was closed down due to a lawsuit. The current fund holders can't even get their money out! I don't know if Rogers is trustworthy now, or not. He apparently was not prudent in his selection of the middleman used for the transactions, and that company is in bankruptcy.

Anyway, Rogers makes sense, but don't forget, he is a salesman for his own commodities index fund.

How is it possible that commodities go up when demand declines in a recession? He gave examples, but I would like to hear what was different back then. Maybe in those past recessions, commodities demand was high in other countries. Now, in a global economy, we are interlinked. If US demand wanes, China's exports and demand for commodities wanes as well. 40% of China's exports are to the US. They are dependent on us for now.

[qwerty]

Couple of doubts about what Mr Rogers said:

1/ He didn't explain why wheat and sugar will rise dramatically in future, as opposed to other commodities, other than by appealing to the fact they are far from their historic highs Well so is DRAM. It's not because no one can afford either wheat, sugar or DRAM right now - they are cheap because they are in abundance.

Now they can build more fabs but crops are different. Still ..

Why would they need to get back to those peaks. If it's the kind of inflation that Volcker fought, sugar and wheat will do just as well as all other commodities, no?

And if it's going to rise because of real demand, then why haven't we seen it already?

Maybe it's because he expects all those Asian workers to start eating cake at some point. But, surely they'd be doing this at about the same time as a fitness center or day spa opens in their village?

I guess the cost of producing wheat in this country might be in for a rise once fertilizer is no longer cheap (based on oil price - but Govt subsidized in many ways I think).

2/ Another reason to invest in commodities is to hedge the risk of a major decline in the dollar, such as by investing in raw materials produced by countries like Canada. There you get the double benefit of both the appreciation in prices of commodities Canada produces and an appreciation in the Canadian dollar relative the US dollar.

I don't see the double benefit to this.

I don't see how the fact that the commodity is produced in Canada makes a difference. The world price of lumber in USD might go up faster than the price in CAD (as the USD falls against the CAD),. but once I have paid for the lumber (in USD or CAD - doesn't matter which) I am still going to make the same amount of USD profit regardless of whether the lumber came from just north or just south of the border.

Or must one assume that the price of something like lumber will be driven by supply costs in the country of origin rather than demand? Such that if the CAD rises in value, the lumber price won't drop to reflect what the Chinese can pay, but will stay at the same CAD price because all those loggers have to be paid their usual bonuses?

[ChessMan]

I was kinda hoping someone would post a link or explain how government subsidies for wheat, corn, and sugar were going to go away, but I take the silence on the issue to mean they are not going away.

If the government continues subsidizing agriculture, it is foolish to think prices for wheat, corn, and sugar will rise like precious metals.

[jk]

The Rogers Fund used refco as its commodities broker. When refco blew up, it was discovered that while the fund's money was supposed to be held in a segregated account, it wasn't. The fund ended up as an unsecured creditor. I don't know enough to comment about what kind of due diligence would have been required to uncover what was, in essence, fraud.

My problem with agricultural commodities is the variety of factors that drive them: weather, insects, input costs. Marc Faber has noted that if the Chinese just increase their level of coffee consumption not to that of Seattle residents, but merely to that of the Japanese, Taiwanese and Hong Kong residents, it means [some huge number] of increased coffee demand. I suppose so.

But PM's seem easier to analyze and a surer bet.

[BK]

A better question will Government subsidies increase?

Delivery of agricultural product will be a huge added cost if we have a future with lots of inflation. So, the cost will rise because of all the costs involved in delivery.
Don't underestimate how the amount of produce United States imports as keep the cost of produce down. If it becomes incredibly expensive to ship pineapples from Africa (Dole has moved alot of the Pineapple production to africa - really cheap labor for picking fruit). Pineapple producers closer to the US can demand a higher price.

Higher fuel costs will eliminate the low cost soltution that depends on a cheap oil delivery network.

Perhaps inflation will help US based farmers?

[EJ]

Rogers is selling his commodities index fund. Prudent Bear its bear fund. Etc.

Rogers appears to have made a poor choice in Refco, but that doesn't make his ideas on commodities invalid. I give him a lot of credit for flying all over the planet and getting on the ground to see what's going on for himself to develop his beliefs. He didn't learn what he knows by sitting in his pajamas and surfing the web. As one who has logged a ot of miles, I respect a guy with his track record who still hits the road to see for himself what's going on before offering an opinion that will impact a lot of people. I do think he's really trying to help his audience make money from what he's learned. No, he's not an academic; he does want to make money. I trust him more rather than less for that. If I worry about anything re Rogers it's his optimism. He was rich by age 37. He worries for whom? Not himself. His kids? Yes, I think he worries for them and that motivates him.

Yes, he wants his fund to succeed but likely more for the sake of his invesors and his reputation than for his direct gain. I can only imagine that the choice of Refco is one of his greatest regrets. I didn't ask him about it out of respect, plus what can he say besides that it's in litigation? He's not the only one to suffer from Refco. He's in a long line with a lot of other experienced investors who believed as he did that Refco was legit. Because of that decision, he may never make much off of all his hard work to determine that commodities are the place to be for the next ten years. Ultimately, the measure of his integrity is how hard he works to get his investors' money back.

[Charles Mackay]

Thanks for the timely interview EJ. I was very curious as to his reaction to Buffet's comments on gold and commods. I completely buy into Rogers scenario of a long term bull market in commods.. I was disappointed that his prediction of an impending China slowdown that would have resulted in a nice setback and buying opportunity in commods didn't materialize... they just kept going with no setback so I missed adding to positions.

I think many are still confused over Kondtratieff winter, interest rates, linkage, and commods. Yes we will have a severe recession and depression and yes commodities will still soar.. just as they did in the 30's and just as they did in the 60's and 70's. Much of it is in the "inclination to hoard" which is the socionomic aspect of a bear market. How do you keeps some of your wealth that you made in the previous good times.

CM

[blazespinnaker]

it's interesting to note that Buffet is not bearish on wheat, but was more concerned about metals..

[EJ]

100% of the public company CEOs I know are pissed off about having a bunch of 28 year olds with their hands on piles of money telling them how to run their business. I bet Buffett is sympathetic. This is in my view behind most of his rants about hedge funds and derivatives, which he sees -- correctly -- as an aberration of an out-of-control debt market and bad for business generally and his business specifically. He's trying to make good bets on good companies. That's hard to do when perfectly well run albeit underpriced companies can be torpedoed by some kid with hundreds of millions of dollars to throw around. Since metals are now the subject of the same group of hot money market manipulators, he's leery. Just a guess.

[ChessMan]

Here's speculation about why Buffet didn't make money on Silver: http://www.investmentrarities.com/weeklycommentary05-08-06.html

Maybe this has something to do with Buffet's attitude.

[blazespinnaker]

Good article, ChessMan.

[aa]

Looking at the gold charts from 1975 to 1985 and using the rough inflation adjustment that's been used here (2.5?), the current chart looks very similar to the middle of 1979 when the price started to take off vertically (around 300 or so).

Yes, at that moment gold was cheap compared to it's eventual top of 850 (2000 today) but that whole run up and peak was very fast and very short lived. Just like any bubble (the internet bubble included), it is very difficult to pick the peak and get out at the very top.
After the peak, it immediately dropped back to 600 and then there were 5 years of falling prices, and the price was back to $300 in 1985.

Perhaps gold is not expensive at the moment and perhaps it will go much higher in the near or far future, but history also shows that it could also be back to the current price in 5 or 10 years time. You can still lose if you get the timing wrong - and getting the timing right is very difficult.

Oh, and doesn't the copper chart look just like an internet stock back in 2000 ?

[jk]

i think the fundamentals are different now than they were in 1980. for example, how likley do you think that bernanke will follow in volcker's footsteps instead of greenspan's? volcker broke the back of the inflation in the 70's. i think the fed now is petrified by the idea of housing values plunging and kicking off deflation. bernanke's famous helicopter speech during the deflation scare of 2003 made clear what the real worries are at the fed.

as for copper and internet stocks- i'm sure there is a great deal of speculative piling on by hedge funds and proprietary traders, in copper and in the gold and silver too. so a sharp correction is inevitable. but not a bear market anytime soon. the fundamentals support the metals. the internet stocks were mere dreams, hypothetical businesses, not real ones. on the other hand copper appears in everything that has electronics or electricity, houses, automobiles, motors, etc. and as long as the world's central banks keep producing a flood of liquidity, precious metals will increasingly return to their role as money, especially money as a store of value.

[mytaxman]

I think the farm commdity price increase (sugar, wheat, corn, etc) will come from a "rob Peter to pay Paul" or substitution effect. The rise in the price of oil makes the use of corn and sugar for ethanol the highest use. Brazil uses almost all of its sugar for ethanol. We will end up using the bulk of our corn. Anybody that can afford to build an ethanol plant will be crazy to feed the corn to animals or to make sugar. So wheat will become an animal feed to replace corn.

mytaxman

[EJ]

I think the farm commdity price increase (sugar, wheat, corn, etc) will come from a rob Peter to pay Paul or substitution effect. The rise in the price of oil makes the use of corn and sugar for ethanol the highest use. Brazil uses almost all of its sugar for ethanol. We will end up using the bulk of our corn. Anybody that can afford to build an ethanol plant will be crazy to feed the corn to animals or to make sugar. So wheat will become an animal feed to replace corn.

mytaxman

Ethanol is about politics not about energy.

If you believe ethanol advocates, ethanol is the savior of our rural economy and environment and is a vanguard in the war on terror. However, a hard look at the facts shows that the purported benefits of ethanol are an illusion. It's not cost-effective, requires massive subsidies, has negligible environmental and economic impacts, and doesn't enhance energy security. When it all comes down to it, ethanol amounts to nothing more than 'subsidized food burning' as Cornell University's David Pimentel puts it.

http://www.pureenergysystems.com/news/2005/04/12/6900080_Acetone_and_Ester/Ethanol_Mandates_Subsidies.doc

...ethanol is an inefficient, expensive fuel. Just look at the 3- to 5-cent-per-gallon increase in gasoline prices during the winter months in the Washington, D.C. area when ethanol is required to be added to the fuel.

Finally, let me quote Stephen Moore, of the CATO Institute, who puts it very succinctly in a recent paper:

...[V]irtually every independent assessment--by the U.S. Department of Agriculture, the General Accounting Office, the Congressional Budget Office, NBC News and several academic journals--has concluded that ethanol subsidies have been a costly boondoggle with almost no public benefit.

So why do we continue to subsidize the ethanol industry? I think James Bovard of the CATO Institute put it best in a 1995 policy paper:

...[O]ne would be hard-pressed to find another industry as artificially sustained as the ethanol industry. The economics of ethanol are such that, for the industry to survive at all, massive trade protection, tax loopholes, contrived mandates for use, and production subsidies are vitally necessary. Only by spooking the public with bogey-men such as foreign oil sheiks, toxic air pollution, and the threatened disappearance of the American farmer can attention be deflected from the real costs of the ethanol house of cards that consumes over a billion dollars annually.

http://mccain.senate.gov/index.cfm?fuseaction=Newscenter.ViewPressRelease&Content_id=481

Current ethanol production in the U.S. is a waste of money and food and should be halted immediately to increase focus on more viable alternatives.

[jk]

re ethanol- yes, it's a government boondoggle. the u.s. subsidized corn to ethanol program must be distinguished from brazil's cane sugar based program. we'd have to lower our sugar price supports to make a program work - it will never happen as long as the iowa caucuses are the first round in the quadrennial presidential follies.

[Jim Nickerson]

it's interesting to note that Buffet is not bearish on wheat, but was more concerned about metals..




Perhaps it has to do with buy low, sell hight.

Jim

[memyselfandi]

okay.. so... other than buying individual futures contracts, how a little guy invest in commodities like corn/sugar/wheat/etc?

Are there mutual funds/ETFs/etc. that invest in commodity futures directly that a non-accredited, individual investor, can buy?

I know that PIMCO and others have funds that invest in structured notes, which I guess are linked to commodity prices derivatively. But is that (the structured note) riskier than investing directly in commodity futures?

Anyway, anyone with any suggestions?

[Jim Nickerson]

okay.. so... other than buying individual futures contracts, how a little guy invest in commodities like corn/sugar/wheat/etc?

Are there mutual funds/ETFs/etc. that invest in commodity futures directly that a non-accredited, individual investor, can buy?

I know that PIMCO and others have funds that invest in structured notes, which I guess are linked to commodity prices derivatively. But is that (the structured note) riskier than investing directly in commodity futures?

Anyway, anyone with any suggestions?

Recently Deustche Bank began a commodities ETF--DBC. It invests in light sweet crude oil, heating oil, corn wheat, gold and aluminum which I guess were picked because of their liquidity.

http://www.etfconnect.com/select/fundpages/etf_funds.asp?MFID=153467 may get your to some comments on the fund.

Jim