Avtar Singh Comm&Derivative-Jkt

7/29/2019 Avtar Singh Comm&Derivative-Jkt

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Asian Commodities and DerivativesConference

Identifying the Dynamics Drivers in

Commodities Trading

Avtar SanduPhillip Futures


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Disclaimer

The information contained in these course materials provided is the option of the CourseTrainer and not Phillip Futures. These course materials contain information of a generalnature only and are produced for investor education purposes only. They do notconstitute investment advice in any manner whatsoever or have any regard to thespecific investment objectives, financial situation or individual needs of any particularperson receiving them. Examples are used for illustrative purposes only and do notconstitute investment advice.

Phillip Futures, nor the course trainer, makes no guarantee, warranties, representationsof any kind whatsoever, express or implied, including but not limited to, the accuracy,completeness, merchantability, or fitness for any particular purpose, of such informationor as to the results obtained by any person from the use of any information or anyfinancial instrument mentioned in the course materials.


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Commodity Boom

Greatest Boom in recent

history

Boom was largely

unexpected

Fundamentals,

speculation and

macroeconomic factors

all played a role

Continuous Commodity Index


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Current commodity boom compared

with earlier price hikes

Much longer

Price increases also much

larger

More board based


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Features of Commodity Markets

Demand does not change

much with price

Neither does supply in theshort term

So shocks can have a big

impact on price


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Analysis of recent price increase

Demand Factors

A Strucutural Change

Steadily rising population

Strong economic development

Larger and larger share of annual

consumption growth

Slower improvements in resource use Decreasing interest rates and

depreciation of the US dollar


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Supply Factors

Weather Related - La Nina andEl Nino

Producers slow to respond todemand

Increase cost of inputs inproduction process

High energy and fertilizer cost


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Increased Fund Activity

Well functioning financial markets arecritical for well-functioningcommodity markets

Speculation, hedging and arbitrage areimportant elements

However investment activity shiftingout of equities and mortgage related

products and into commodities maycause prices to inflate/deflate beyond

their fundamentals levels???? But Data analysis have not shown a

consistent relationship between risinginvestment activity and rising prices


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The $ and Commodities

Most commodities are priced in

Dollars

This weakness in the currency in

which an asset is denominated would,

by definition, result in an increase in

the assets price

Can changes in commodity prices be

fully explained by changes in Dollar

value.

Each Commodity has its own unique

global supply-and-demand profile,


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The $ and Commodities

The $ is often a significant secondary driver. As S/D data are usually estimatesand piecemeal, its easier to game commodities thru $ real time price data

Long term $ weakness


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Population Growth

Main increase in urban areas of

developing countries.

Migration to urban areas causes

abandonment of land farmed


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Linking global money supply to future

inflation

Many investors are raisingconcerns that strategies put in

place by central banks across

the globe

including what iscommonly referred to asquantitative easing toreactivate the world economyand steer it away from adepression will ultimatelydebase fiat currencies and result

in inflation.

Aggregate money supply (US$ billion


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BioFuel Production

High crude oil prices causinggovernments to setup bio-fuel

production targets

In 2010 4.75% of all EU motorfuel consumption is to met by

bio-fuels, US set a target ofalmost 30bn liters bio-fuel

In 2012, Brazil, China and Indiaas well as Thailand has alsoformulated ambitious targets


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Commodity Futures returns


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World Consumption & Inventory

Historically inventory to usage ratio of below 25% increases volatility. In 2008,when commodities prices reached their peak, despite a record harvest for maize (up11%) and wheat (up 15.24%) compared to 2007, average global grain stocksreached 18.7% of annual global utilization, equivalent to 68 days worth of global

supply, well below the long-term average.


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Grains

Corn Wheat

SoyBeans Rough Rice


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Softs

Arabica Coffee

Liffe Cocoa

Raw Sugar


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Edible OilsPalm Oil SoyBean Oil


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Assessing Agriculture

Fundamentals supply, demand, ending stocks,

weather

View/trend

Risk reward ratio, Volatility

Technicals/Entry Points

Rolls Trading strategies


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Coffee Fundamentals - Demand

The United States is thelargest importer of coffee.

The world typically consumesmore than 130 million, 60 kilo

bags of coffee per year. Kraft, Nestl, Procter &

Gamble, and Sara Lee are the"Big 4" roaster companies thatbuy about 50 percent of all theannual production of coffee.


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Coffee Supply

Total production for crop year 2010/11 is

estimated at 133.7 million bags, representing anincrease of 8.6% in relation to the preceding cropyear.

A fall of 3.2% is expected in the Asia & Oceaniaregion where Indonesia has recorded a significantdecline due to adverse weather conditions.

Production has increased in other regions,particularly in Mexico & Central America and

South America, where Brazil has produced atleast 48 million bags during crop year 2010/11.

Although crop year 2011/12 is an off year in thebiennial cycle for Arabica production in Brazil, atotal crop of more than 43 million bags is nowexpected

Colombian production is slowly recovering fromthe low levels of the three preceding crop years

and an increase is expected in crop year 2011/12

The difference between the high and low years ofthe Arabica cycle has fallen in recent years, whichappear to indicate that further decreases maycontinue in the future.


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Stocks World stocks have been significantly

eroded due to supply problems andincreased exports.

The volume of opening stocks in cropyear 2010/11 is around 13 million bags,

representing a fall of more than 33%compared to the level recorded at thebeginning of crop year 2009/10.

Inventories held in importing countrieswere estimated at around 18.3 million

bags at the end of December 2010.

Source:ICO


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Stocks-to-Use Ratio trending down over years

Green Coffee Stocks-to-Use Ratio

0

5

10

15

20

25

30

35

40

45

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11

Ratio

Source: USDA-FAS


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Liffe Coffee Weekly Price Chart July


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Contact

Phillip Futures250 North Bridge Road#07-01 Raffles City TowerSingapore 179101

Avtar Sandu

Senior Manager

Commodities Desk (65) 6531 1509 [email protected]

Avtar Singh Comm&Derivative-Jkt

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