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Corn, Sugar Lure Goldman, Faber; Subprime Dents Metal

By Tom Cahill and Feiwen Rong

Aug. 20, 2007 (Bloomberg) Commodity investors may never have a better time to buy corn, cotton and sugar instead of oil and copper. Sugar, the world's primary source of ethanol, is the cheapest it has ever been relative to crude oil. Corn this year dropped the most since 1998 after U.S. farmers planted the biggest crop since World War II. Cotton is the worst commodity investment over the past three years.

Goldman Sachs Group Inc., the world's biggest securities firm, is recommending corn after correctly predicting a rally earlier this year. Former hedge fund manager Jim Rogers and Marc Faber, who told investors to sell U.S. stocks a week before the 1987 crash, also say agricultural commodities are the ones to buy. Wheat, coffee and corn this month outperformed almost all commodities in the UBS Bloomberg CMCI index. Oil tumbled 8 percent and copper fell to the lowest price since March as loan losses hurt consumer demand.

"If we see a global slowdown developing, it won't affect agricultural commodities because people still eat," said Sean Corrigan, chief investment strategist at Diapason Commodities Management, with $6 billion under management in Lausanne, Switzerland. "Steel, iron ore, nickel may suffer. But people will go to the shops to buy bread and potatoes."

Food Price Gains

The rebound in food prices is buoying inflation as financial markets weaken on subprime mortgage losses. The U.S. Federal Reserve cut the interest rate on direct loans to banks on Aug.17 by 0.5 percentage point to 5.75 percent to revive economic growth. The unexpected reduction was the first between scheduled Federal Open Market Committee meetings since 2001.

"The Fed has recognized that we have major, major, major problems," said David Threlkeld, president of Resolved Inc. in Scottsdale, Arizona, who has traded metals for 40 years. "We have the same problems as in the subprime market. The metals markets are poised to go through the same circumstances."

Sugar's 20 percent decline this year has left it so cheap that investors can buy almost seven sugar contracts for every one of crude oil, the most in at least 20 years, based on prices on the New York futures exchanges. A ton of crude oil on the New York Mercantile Exchange today costs 2.5 times more than a ton of sugar on the New York Board of Trade. For the past decade, the two commodities traded at about the same average price.

Shrinking Stockpiles

While there's a projected surplus of 11 million metric tons of the sweetener, bad weather may cause the global stockpile to shrink, said Greg Smith, founder of Global Commodities Ltd. in Adelaide, Australia, manager of a $210 million commodities fund. "The risk is now mostly in the upside as wild weather season approaches," said Smith, who said storm damage may send sugar prices doubling to 20 cents a pound, from 9.4 cents a pound as of Aug.17 on the Nybot. "We consume a lot of sugar both for food and now energy, while unfortunately the weather patterns are becoming more extreme."

Cotton, which has lagged behind the other 25 commodities in the UBS Bloomberg CMCI Index since 2004, may gain because of rising sales to Chinese textile companies. Prices may rise to 67 cents a pound within a month, a 17 percent gain from the 57.5 cents on the Nybot, according to an Aug. 15 report from Barclays analysts including Kevin Norrish in London. Rising incomes in China and India will also sustain demand for meat, increasing consumption of corn and soybeans for animal feed. U.S. farmers' net income will rise by $6 billion, or 9.9 percent, to $66.6 billion this year, the U.S. Department of Agriculture forecast in February.

China's Appetite

McDonald's Corp., the world's largest restaurant company, plans to have at least 1,000 stores in China next year, up from 800 now. Yum! Brands Inc., the owner of Pizza Hut, KFC and Taco Bell, will add 400 Chinese locations, part of at least 1,000 stores opened outside the U.S. annually for seven straight years. "There are 3 billion people in Asia who were not involved the last time we had a commodities rally and aren't going to lose their appetite because of problems in the U.S.," said Rogers, who predicted the start of the commodities rally in 1999.

"Even if America goes bankrupt, those 3 billion people are going to continue to do well and eat more," said the 64-year old author of "Hot Commodities." His Rogers International Commodity Index has more than doubled in five years.

Investor Marc Faber, 61, said prices of agricultural commodities are "still extremely low" in real terms and "look relatively attractive" because of potential weather disruptions. "Agricultural are the most favorable, along with cotton and sugar," Faber said. In an Aug.16 e-mail, Faber said that he is concerned about excesses in "all asset prices for now."

Food Sales Gain

Nestle SA, the world's largest food processor, Sara Lee Corp. and H.J. Heinz Co. last week reported that profit exceeded analysts' estimates after sales and prices of their food products increased.

"We have achieved a different level on agricultural prices, and they will stay," Peter Brabeck, chief executive officer of Nestle, said Aug.15 in an interview. "It's due to the increased demand in Asia and also because of the demand for biofuel."

Shipping rates are rising because of orders for bulk commodities, while oil tanker markets sink. The Baltic Freight Index, measuring the cost of moving grain and coal, this year is up 64 percent to a record on the Baltic Exchange. The cost of hauling a barrel of crude oil from the Middle East to Japan, a global benchmark, fell 17 percent during that time.

Rising fuel, fertilizer and equipment costs will drive agricultural prices higher, said James Gutman, executive director and a senior economist at Goldman Sachs in London. Goldman forecast on March 30 that corn would rise to $4.15 a bushel in six months, from $3.745 at the time. The price jumped 16 percent to $4.35 on June 18.

Price Shift

A shift to higher prices "happened first with crude in 2003, we saw the same phenomenon in metals in 2005, and we're now seeing the same phenomenon in grains," said Gutman, who forecasts corn will rise by 27 percent to $4.40 a bushel in 12 months from $3.4575 on Aug. 17. "It makes agriculture the next place to be."

Galahad Gold Plc, a London-based mining-development company, said today it plans to start investing in farmland, crops and livestock because the market for metals is "mature." "Demand for better quality food is being fueled by strong economic growth in many countries," said the company, which is dropping "Gold" from its name. "The macroeconomic indicators for soft commodities have similarities to those of gold and copper when Galahad first invested in mining."

Metals Decline

Nickel, copper and other industrial metals are the biggest losers among commodities since July16 as concerns of a credit crunch spread from U.S. subprime mortgage-backed debt, partly because investors sold to raise money and offset losses elsewhere. "People sell other investments to get cash, as we have seen with the crude oil market and the industrial metals markets," said Christopher Wyke, fund manager at the $1 billion Schroders Agriculture Fund in London. "When it comes to agriculture, there is no connection."

Roland Jansen, chief executive of Mother Earth Investments AG in Lichtenstein, said as much as 33 percent of commodities positions may be held by investors who may be forced to sell to finance margin calls. When they do, he's ready to buy for his $129 million fund.

"This is a great opportunity to expand our positions in agriculture and soft commodities," said Jansen. "We follow weather patterns much more than credit crunches."