For full article: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/04/cccomms104.xml Fears of a commodity crash are growing as speculation continues to outstrip demand. Ambrose Evans-Pritchard reports India faces a mountain of surplus sugar. Over 20m tonnes sit in warehouses, begging for buyers. Brazil has ramped up cane production in a burst of expansion. It is now exporting record amounts of sugar, even after diverting half its harvest into ethanol for cars. By any definition, there is a global glut. Yet this has not stopped sugar futures jumping 40pc since December, reaching $14.18 (£7.15) a pound on the March 2008 contract. Sugar has been swept up with the whole gamut of commodities - grains, metals, oil and gas - in a fevered surge of investment in futures contracts, regardless of the real demand from daily users. Wheat has risen 112pc in four months. Judy Ganes-Chase, a commodity expert at J Gaines Consulting, said the market had become unhinged. "Investors have made far too much of the link between sugar and biofuels. We've had one massive surplus after another, yet people still keep planting more cane. Brazil is the only country where ethanol is actually viable in cars. Everywhere else is building up sugar stocks in mere hope," she said. The sugar syndrome is the starkest evidence to date that the raw materials boom is getting ahead of itself. A variant of the pattern is emerging in industrial metals, crowned by an explosive "short squeeze" in copper last month. Arguably, even crude oil futures have decoupled from the real market.
Of note that I'm not involved in this business, so I don't know everything. I was having coffee about a week and a half ago though with the manager of the local Grain Co-op. He complained alot about how the Ethonol plants pay a premium for the grain, so he obviously does not get as much. But a bigger point he made is how much the game has changed thats not related to the ethonol madness. There are now so many long only commodities funds (Jimmy Rogers for example) that have to continue to roll over contracts that there is a guaranteed dempand there that just never naturally occurs. So, no matter how bad some news is, theres always this group distorting the market because they have to buy, and its kind of put a net under the prices in a lot of cases.
That can work both ways. If those funds start to get redemptions it can exagerrate or even precipitate a downward move. I like being short EWZ here, its a great way to play a possible downturn in the commodities without getting burned in any individual futures.
The key as always is to daytrade to exploit the gyrations and the big daily range (eg CL). West Texas Intermediate is a traders cornucopia. You should all try and forget about where commodities are going: up big or down big. Both are fine.