Thursday, March 27, 2008

The integration deepens...

The stark contrast between agriculture and most of the economy is drawing even more investors. While we have seen it big-time in the grain markets, hedge fund money now is poised to take a more permanent seat at the table.
Ospraie Management LLC, the $9 billion hedge-fund firm founded by Dwight Anderson, agreed to buy ConAgra Foods Inc.'s commodity trading and merchandising operations for $2.1 billion.

The ConAgra Trade Group will be renamed Gavilon LLC when its sale to Ospraie's Special Opportunities fund is completed, Omaha, Nebraska-based ConAgra said today in a statement distributed by Business Wire. The unit has 144 facilities, which are mostly located in North America, and employs 950 people, ConAgra said.

``Buying such assets gives a greater insight into the entire supply chain and helps to complement trading activities,'' said Christopher Peel, chief executive officer of London-based Blacksquare Capital LLP, which invests in hedge funds. ``You get an edge over those that don't have access to the information.''

Hedge funds and securities firms are acquiring stakes in companies that produce and transport commodities to aid their trading of futures contracts amid a six-year rally in prices. Ospraie, based in New York, started its Special Opportunities fund two years ago to buy stakes in commodity producers such as agriculture and mining companies.

Gavilon will be involved in buying and distributing grains and fertilizers, as well as commodity trading and risk management, ConAgra said. Its offices will remain in Omaha. [More]
While farmers are peddling doom on the horizon to Congress in order to prevent payment reform, mucho dollars are betting commodity prices remain lofty for some time, largely due to foreign economic growth (read: China) and the resultant demand.

The willingness of a hedge fund to get into commodity trading directly also hints to me that waves of "outside" money will be commonplace. I think this is also clearly evident in aggressive outlook and pricing strategies by input suppliers like seed and fertilizer.

Farmers will be making their money by coping with powerful adjacent links in the supply chain, both our customers and vendors, who have already gone through consolidation and face less market competition. Until the number of industrial farms has shrunk to allow some increased leverage in both buying and selling, farmers will gradually devolve to pipelines for money from Cargill, ADM, etc. to Monsanto, Case, Agrium, etc.

Everybody hates big farms, but the conclusion I keep reluctantly coming back to is really large operators will be the most likely operations to be capable of thriving in that economic environment, regardless of government policy or popular sentiment.

Big money simply breeds big farms.


Ol James said...

I done a bit of ciphering on this today as I was tilling the garden. A couple of questions..
Are the Market House's setting up so they can control the price and production,(I hate to use this term, MONOPOLY), in the future??
If so, will the "Big Farms" be controled by the company??
And shouldn't Bill Gates be mad if they do??

Anonymous said...

I don't believe so. Rather it is what was mentioned in the article - information flow to better their trading. In the end price levels and volatility will impact the amount produced but their near-term desire is the flow - the market color. Will their trading around the info add volatility and magnify trends? Absolutely. But I wouldn't go as far as price control. There is the other side of the trade and the CFTC to at least mitigate, if not prevent that.