Category Archives: Commodities


Sustainability as an Investment Class


Inflation for breakfast – deflation for the rest of the day

I have been following the rise in food commodity prices recently and if we look at the CRB (Commodity Research Bureau) foodstuffs index we see that it entered 2014 at around 365 and as of last night’s close is at 421.85. So up by just under 16% in the year so far. It has been quite a sharp bounce back from the previous downwards trend that began in the spring of 2011 and we have now regained the drops of 2013.

It appears that these price rises have affected the breakfast habits of at least one journalist on the Financial Times.

“Everything we have for breakfast is up,” said Abdolreza Abbassian at the UN Food and Agriculture Organisation of the increases of coffee, orange juice, wheat, sugar, milk, butter, cocoa and pork. “This has all happened unexpectedly but shows how quickly things can change.”

Apparently the power of the stomach has defeated the usual theme of the Financial Times. Also we see a familiar word with the price rises so step forwards one more time “unexpectedly”. As we look into the detail we see this.

Coffee has soared more than 70 per cent because of unseasonably dry weather in Brazil, while US pigs have been hit by a virus epidemic, leading to a more than 40 per cent rally in Chicago pork prices.

We have discussed before the increasing demand for pork from China as its economy grows so perhaps that too has been an influence here. Also events in the Ukraine have led to upwards pressure on wheat prices as fears of a supply disruption there have helped drive wheat prices (Kansas City) up by 22% since the beginning of February. Those of us who drink tea for breakfast rather than coffee can have a small smile of satisfaction as our preferred tipple or caffeine injection has risen by much less. Indeed the pattern over the past year has been rather different indeed. From the Kenya Broadcasting Corporation.

Tea farmers should brace for reduced bonus this year following an oversupply that has seen prices drastically fall over the last one year…..Tea prices at the Mombasa auction have suffered a 30% decrease since July 2013 as a result of increased supply.

However whilst disinflationistas may be feeling better I have a troubling thought which is that the breakfast tea I prefer has risen in price. Surely some mistake? No this represents the way of an increasingly complex price pattern and delivery in these times and as it currently has a special offer I took a supply from the shelves. Why? Special offers are often the supermarkets way of producing a fog over a price rise and the two are heavily correlated in my experience.Smoked Salmon Eggs Benedict

The Financialisation of it all

There is a familiar force at play here too. Again from the FT.

Financial speculators have started to pile into agricultural commodities, pushing net “long” or bullish positions to the highest level in four-and-a-half years.

This is a familiar feature of the credit crunch era where these forces have risen in power since the advent of policies like Quantitative Easing began but of course we are regularly told that this is a pure coincidence.

Some prices have fallen

Having covered the impact of China on the falling price of copper and iron ore there is this factor to add into the mix. This problem is, in many respects, building as the Yuan has dropped again to 6.20 to the US Dollar today. But there is an undercut which is that the CRB metals index has been falling at a slower pace (4%) than foodstuffs have been rising in 2014 so far.


WEF Impact Investing Report

wef-impact-investing-thumbOver the last few years, much excitement has been generated around the term “impact investing” – an investment approach that intentionally seeks to create both financial return and measurable positive social or environmental impact. Despite the buzz, there is limited consensus among mainstream investors and specialized niche players on what impact investing is, what asset classes are most relevant, how the ecosystem is structured and what constraints the sector faces. As a result, there is widespread confusion regarding what impact investing promises and ultimately delivers.

This report is a result of engaging over 150 mainstream investors, business executives, philanthropic leaders and policy-makers through interviews, workshops and conference calls. The overall objective of the Mainstreaming Impact Investing initiative is to provide an initial assessment of the sector and identify the factors constraining the acceleration of capital into the field of impact investing.

Download the report (PDF)



I read the recent whitepaper: “Sortino: A Sharper Ratio” by Red Rock Capital with great interest. You see, as I’ve discussed before, the Sharpe ratio is both one of the most accepted and at the same time most critiqued forms of performance measurement in the managed futures world. The better ratio for many, including us – is the Sortino ratio, which doesn’t penalize programs for outlier gains as the Sharpe ratio does.

Here’s a little recap on the two… Sharpe measures Return divided by (upside and downside) volatility, while the Sortino measures Return divided by (downside) volatility only.

The general way we’ve seen the Sharpe and Sortino ratios calculated is as follows, with the Sharpe’s denominator the standard deviation of all returns, and the Sortino’s the standard deviation of all negative returns. Seems simple enough:

“Sharpe = (Compound ROR – risk free ROR) / (Standard Deviation of Returns)”

“Sortino = (Compound ROR – risk free ROR) / (Standard Deviation of Negative Returns)”

But is the industry as a whole using the Sortino ratio correctly? Our friends at Red Rock Capital don’t think so, saying in their recent paper:

“We believe the Sortino ratio improves on the Sharpe ratio in a few areas. [But] the purpose of this article…is not necessarily to extol the virtues of the Sortino ratio, but rather to review its definition and present how to properly calculate it since we have often seen its calculation done incorrectly.”

Red Rock states the real definition of the Sortino ratio uses not the standard deviation of negative returns, but instead the ‘target downside deviation’, which is the deviations of the realized return’s underperformance from the target return. What does that mean to the normal person who has trouble reading math equations? Well, it means the usual method of throwing away all the positive returns and taking the standard deviation of negative returns isn’t technically correct, as it ignores the fact that you’re supposed to be looking at just the below target return deviations.

As Red Rock puts it:

“Standard deviation is a measure of dispersion of data around its mean, both above and below. Target Downside Deviation is a measure of dis­persion of data below some user selectable target return with all above target returns treated as underperformance of zero. Big difference.

The [correct] Sortino ratio takes into account both the frequency of below target returns as well as the magnitude of below target returns. [The normal way of] throwing away the zero underperformance data points removes the ratio’s sensitivity to frequency of underperfor­mance. Consider the following underperformance return streams: [0, 0, 0, -10] and [-10, -10, -10, -10]. Throwing away the zero underperformance data points results in the same target downside deviation for both return streams, but clearly the first return stream has much less downside risk than the second.”

Which method is correct? We will take Red Rock’s word for it that this is how the equation was originally written up – but we also know that the other method is quite widely used (our own website, for example). Surely there is value in the widely used method, but Red Rock makes some excellent points on the issues therein. So, we looked at a few programs (the 10 largest CTAs as of June 2013 plus Red Rock) to see what differences were there between the widely used Sortino method and Red Rock’s “correct” method.

You can see the value of the Sortino rose in each program on our list by using the calculation outlined by Red Rock, but we know that Sortino values don’t really mean all that much. The measure is better used as a way to compare the risk adjusted performance of programs with differing risk and return profiles. Any risk adjusted ratio is really trying to just normalize the risk across programs, and then see which has the higher return per that normalized unit of risk.

So, when considering not the value of the ratio when changed, but what the changed value does to a ranking by Sortino ratio of the world’s biggest managed futures programs – what do we see? Not much, to be honest, as the top four remained in the same order. However, there was some movement in the rankings, Transtrend and Lynx switching places, as well as Aspect and Cantab, but the ranking is pretty close across the two calculation methods.

So, as a practical matter – this doesn’t really move the needle that much, and is likely a more useful tool when analyzing unique track records where all monthly losses are exactly -%5 or the like. The real discovery here seems to be Red Rock Capital – who sports a higher Sortino than some of the royalty of managed futures (i.e. AHL, Campbell, Transtrend) no matter which method is used.

You can view the full paper here: Sortino: A Sharper Ratio

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Posted by on September 13, 2013 in Commodities, Investments


Commodities and geopolitics: regarding the likelihood and risks of escalation of military conflicts

Commodity prices have always been sensitive to geopolitics, but this has particularly been true over the last few weeks and months as the Western powers very nearly got involved in yet another costly military conflict in the Middle East. They may yet do so in the near future, sending the prices of oil and precious metals considerably higher. Today’s post examines the economic phenomenon of deflationary gap which is at the heart of the growing militarism of the western powers and their increasing propensity to resort to war as the key foreign policy tool.

Over the past few weeks we’ve witnessed a disconcerting spectacle of geopolitical maneuvering around the ongoing Syrian conflict. The escalation of military confrontation could have grave and unpredictable consequences. One of the more perplexing aspects of this crisis is the keen appetite for war displayed by the western leaders, particularly those of the US, UK and France. Regardless of the merits of their case, most of us who have grown up in the west were raised to believe in certain values where the political leaders are meant to respect the will of their constituents, where law – including the international law – is upheld whether this is convenient or not, and where war is always the solution of last resort, engaged only in the event of national defense or in response to a clear and present threat. Now, for some reason this has all been turned upside-down. Western leaders seem indifferent to their constituents’ will, international law is routinely and casually ignored, and war is used as the main tool of international policy. Suddenly, the democratic west is rushing headlong to intervene militarily around North Africa and the Middle East with barely any debate about these costly adventures.

The systemic causes of the growing militarism in the west

Following the day-to-day events, the rationale for war is always apparent to a casual observer. Colonel Gaddafi was a bad guy oppressing his own people, so we had to go and help the Libyans. Al Qaeda terrorists were about to take over in Mali and we had to go there and free the people. Now Bashar Al- Assad is killing his own people so we must go and help the Syrians. But while we can always come up with an immediate reason to wage war, what if there was a deeper, more systemic cause that inclines western nations toward armed conflict?

In meticulously tracing the events leading to last century’s two world wars, Carrol Quigley devotes much space in his book “Tragedy and Hope” to an economic phenomenon called the deflationary gap. Quigley considers the deflationary gap as “the key to twentieth century economic crisis and one of the three central cores of the whole tragedy of the twentieth century”.

To explain this phenomenon, and how it can give rise to militarism, we have to go back to economics for a moment. The subject of analysis is a closed economic system in which the sum total of goods and services appearing in the market equals the income of the system and the aggregate cost of producing the goods and services. The sums expended by the businesses on wages, rents, salaries, raw materials, interest, lawyers’ fees, and so on, represent income to those who receive them. The profits are entrepreneur’s income and his incentive to produce the wealth in question. The goods are offered for sale at a price which is equal to the sum of all costs and profits. On the whole, aggregate costs, aggregate incomes and aggregate prices are the same, since they represent the opposite sides of the same expenditures.

However, the purchasing power available in the system is reduced by the amount of savings. If there are any savings, the available purchasing power will be less than the aggregate asking prices by the amount of the savings, and all the goods and services produced cannot be sold as long as savings are held back. In order for all the goods to be sold, savings must reappear in the market as purchasing power. Normally, this is done through investment. But whenever investment is less than savings, purchasing power will fall short of the amount needed to buy the goods being offered. This shortfall of purchasing power in the system, the excess of savings over investment, is the deflationary gap.

Methods of bridging the deflationary gap

Deflationary gap can be closed either by lowering the supply of goods or by raising the supply of purchasing power, or by a combination of both methods.

The first solution will stabilize the economic system on a low level of economic activity. The second will stabilize it on a high level of economic activity. Left to itself, a modern economic system would adopt the former alternative, resulting in a deflationary spiral: the deflationary gap would lead to falling prices, declining economic activity, rising unemployment, and a fall of national income. In turn, this would cause a decline in the volume of savings, until savings reached the level of investment, at which point the economy becomes stabilized at a low level of activity.

This process was not allowed to unfold in any industrialized country during the great depression of 1929-1934 because the disparity in the distribution of income between the rich and the poor was so great that it would cause a considerable portion of the population to be driven to absolute poverty before the savings of the richer segment of the population could decline to the level of investment. Moreover, as the depression deepened, the level of investment declined even more rapidly than the level of savings. To avert social uprisings, governments of all industrial nations attempted to generate a recovery through two kinds of measures: (a) those which destroy goods and (b) those which produce goods which do not enter the market.

Averting depression through destruction of goods

The destruction of goods will close the deflationary gap by reducing the supply of unsold goods. While this is not generally recognized, this method is one of the chief ways in which the gap is closed in a normal business cycle. In such a cycle, goods are destroyed by the simple expedient of underutilizing the system’s production capacities. The failure to use the economic system at the 1929 level of output during the years 1930-1934 represented a loss of goods worth $100,000,000,000 in the United States, Britain, and Germany alone. This loss was equivalent to the destruction of such goods.

Destruction of goods by failure to gather the harvest because the selling price is too low is a common phenomenon under modern conditions, especially in respect to fruit and vegetable crops. While the outright destruction of goods already produced is not common, it has occurred in the depression years 1930-1934: stores of coffee, sugar, and bananas were destroyed, corn was plowed under, and young livestock was slaughtered to reduce the supply on the market. The destruction of goods in warfare is another example of this method of overcoming deflationary conditions in the economic system.

Producing goods that don’t enter the market The second method of bridging the deflationary gap, by producing goods which do not enter the market, supplies purchasing power in the market (the costs of production of such goods enter the market as purchasing power), while the goods themselves do not drain funds from the system, as they are not offered for sale. New investment would be the natural means to accomplish this, but modern economic systems in depression do not function this way. Rather, private investment tends to decline considerably. Alternatively, purchasing power must be supplied to the system through government spending. Unfortunately, any program of public spending quickly leads to the problem of public debt and inflation, which tends to compound the problems rather than solving them.

War: the irresistible solution

Approaches to public spending as a method of financing an economic recovery can vary depending on its objectives. Spending for destruction of goods or for restriction of output, as under the early New Deal agricultural program is hard to implement in a democratic country, because it obviously results in a decline in national income and living standards. Spending for nonproductive monuments or prestige projects like space programs is somewhat easier to justify but is not a long-term solution. The best approach, obviously is investing in productive capital goods, since it leads to an increase in national wealth and standards of living and constitutes a long-run solution.

Unfortunately, this approach runs into ideological head-winds in modern economies as it constitutes a permanent departure from the system of private capitalism. As such, it is easily attacked in a country with a capitalistic ideology and a private banking system. Instead, developed nations tend to favor the most dangerous method of bridging the deflationary gap: spending on armaments and national defense.

The appeal of this method is always rooted in political and ideological grounds. Military spending tends to help heavy industry directly and immediately. Heavy industry suffers earliest and most drastically in a depression, which absorbs manpower most readily (thus reducing unemployment). This tends to make it very influential in most countries. Defense-related spending is also easily justified to the public on grounds of national security. But increasing defense spending enhances the political clout of the military-industrial complex and tends to increase a nation’s reliance on the military in the conduct of its foreign policy and an escalation of conflict which leads to further increases in military spending. The vicious cycle ultimately results in the emergence of fascism: the adoption by the vested interests in a society of an authoritarian form of government in order to maintain their vested interests and prevent the reform of the society.

In the last century in Europe, the vested interests usually sought to prevent the reform of the economic system (a reform whose need was made evident by the long-drawn depression) by adopting an economic program whose chief element was the effort to fill the deflationary gap by rearmament.

Quigley’s analysis, based on the historical developments in the aftermath of the economic depression of the early 1930’s closely parallels today’s events. The economic crises which germinated from the same systemic feature present in the modern economic system followed a similar pattern in economic and political developments that we are witnessing today.

To avert a deflationary depression, US Government ramped up military spending

In the last 100 years, we have seen similar developments lead to two world wars, the second of which included the use of nuclear weapons. Today, as we seem to be sliding in the same direction, the question is whether we can extricate ourselves from this destructive path. If the day-to-day events are shaping the outcomes, then no one can tell. But if they are shaped by systemic attributes inherent to our socio-economic system, then we should expect further expansion and escalation of military conflicts around the world in the following years.

Escalation of military conflict and investor risks

Sadly, we have to consider this problem from investor point of view as well – and here, while the outcomes are unpredictable, the key risks to investors are rather clear, and they include:

  • sharp rises in commodity prices
  • high inflation
  • sustained rise in interest rates
  • deepening economic recession, and
  • increasing asset price volatility

Are We Really One Year Away From Global Riots

Are We Really One Year Away From Global Riots

We Are Now One Year Away From Global Riots, Complex Systems Theorists Say. Brian Merchant lays out an interesting connection.

What’s the number one reason we riot? The plausible, justifiable motivations of trampled-upon humanfolk to fight back are many—poverty, oppression, disenfranchisement, etc—but the big one is more primal than any of the above. It’s hunger, plain and simple.

If there’s a single factor that reliably sparks social unrest, it’s food becoming too scarce or too expensive. So argues a group of complex systems theorists in Cambridge, and it makes sense.

 In a 2011 paper, researchers at the Complex Systems Institute unveiled a model that accurately explained why the waves of unrest that swept the world in 2008 and 2011 crashed when they did. The number one determinant was soaring food prices. Their model identified a precise threshold for global food prices that, if breached, would lead to worldwide unrest.

Pretty simple. Black dots are the food prices, red lines are the riots. In other words, whenever the UN’s food price index, which measures the monthly change in the price of a basket of food commodities, climbs above 210, the conditions ripen for social unrest around the world. CSI doesn’t claim that any breach of 210 immediately leads to riots, obviously; just that the probability that riots will erupt grows much greater. For billions of people around the world, food comprises up to 80% of routine expenses (for rich-world people like you and I, it’s like 15%). When prices jump, people can’t afford anything else; or even food itself. And if you can’t eat—or worse, your family can’t eat—you fight.

Continue to read Brian Merchant’s excellent blog posts by clicking here

Watch our quick video – 10 Reasons to Invest in Agriculture – Now by Anric Blatt



by anric


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World Hunger Day – 28th May 2013

World Hunger Day – 28th May 2013

900 million to one billion, more than one eighth of the world’s population live in extreme hunger and poverty and exist on less than 80 pence ($1.20) a day. Thats one in every 8 people.

Hunger kills more people than AIDS, malaria and tuberculosis combined. Millions of women, men and children die each year because of chronic persistent hunger – TWO million are children.

Of the thousands of people who live in hunger and poverty, 10 percent are suffering from extreme famine.However, particularly whilst the focus of the world is on high profile crises, it is vital that we recognise that, even today, the 90 percent majority of those suffering with hunger and poverty are living in other parts of the world, not affected by famine, earthquake or flood, but because of the chronic persistent hunger that exists in the developing world, in particular, Africa, South Asia and Latin America.

Chronic, persistent hunger is not due merely to lack of food. It occurs when people lack opportunity to earn enough income, to be educated and gain skills, to meet basic health needs and have a voice in the decisions that affect their community.

World Hunger Day is about raising awareness of this situation. It is also about celebrating the achievements of millions of people who are already ending their own hunger and meeting their basic needs.

Here are three great Organizations that are making a difference that deserve y(our) support:

Related:  16 October 2013, FAO (Food and Agriculture Organization of the United Nations) – World Food Day to  gives focus to World Food Day observances and helps increase understanding of problems and solutions in the drive to end hunger. “Sustainable Food Systems for Food Security and Nutrition” will be the focus of World Food Day in 2013.


by nick


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