Australian Grains Industry Conference

Transcription

1 Australian Grains Industry Conference 2011 MERRICKS CAPITAL Adrian Redlich where preparation meets opportunity

2 About Merricks Capital Australian based funds manager established in Employees (9 investment focused) who are internationally experienced and focused on industrials, materials, commodities and energy sectors Very close relationships in the industrial and food supply chain and this competitive advantage assists in identifying and capitalizing on opportunities Focus on specific sectors where valuation analysis has merit, experience is high and that are consistent with background of principals and shareholders Market neutral portfolio resulting in non directional investment returns Shareholders h are senior staff together with the Australian based Liberman Family, who own larger food processors and primary production Regulated - US SEC Registered Investment Manager and ASIC AFSL Holder 2

3 Soft Commodity Fund Strong absolute and relative performance since inception in January % with positive returns in all three years Out performed S&P Agriculture Index by 54% Fund focuses on investment opportunities along the food supply chain, favouring long commodities that are in scarce supply and shorting commodities that are in excess supply Fund seeks to take advantage of situations where specific supply and demand imbalances create both long and short opportunities in agricultural commodity markets Investment universe includes grains, oilseeds, dairy, cotton and sugar Trade physical commodities, exchange based futures and options markets, and OTC markets 3

4 Performance History Return +8.0% +20.3% +16.1% +2.1% Standard deviation 7.9% 7.9% 7.1% 4.6% Sharpe ratio *To 30 April 2011 Merricks Capital Soft Commodities Fund vs. MSCI World and S&P Agriculture Index Out performed MSCI World by 58% Out performed S&P Agriculture Index by 54% Dec 07 May 08 Oct 08 Mar 09 Aug 09 Jan 10 Jun 10 Nov 10 Apr 11 Fund MSCI World S&P GSCI Agriculture Index 4

5 Ags Considered an Asset Class $100bn of passive index money is invested in agricultural commodity markets Change in month on month flows into all commodity funds appears to impact next months wheat price??? Agricultural Commodities are currently considered an Asset Class US $bn Total Ag Commodity AUM US $bn Monthly Inflows by Commodity Sector and Wheat Future Prices 8 Jun 10 Sep 10 Dec 10 Mar 11 Jun Ags Base Energy Precious Wheat Prices 5

6 Three Types of Hedge Funds in Agricultural Markets Fundamental & Relative Value smaller funds that generally specialize in commodities. Buy/ Sell commodities where they believe the price (spreads) diverges from the fundamentals Marco Funds worlds largest hedge funds who enter the commodity markets driven by macro themes. Systematic Traders driven by technical indicators such as volume, price momentum, option pricing and investor behaviour. Generally do not pay any attention to the fundamentals of a particular commodity. Trading window maybe shorter than one minute. 6

7 Investment Strategies Directional Trades Long or Short a commodity Either exchange traded or physical Calender Spreads Substitution Trades Quality Spreads Long and Short the futures curve of the same commodity Arbitrage the spread between delivery month of the same commodity futures contract Long and Short substitutable commodities Exploit over valued or undervalued commodities that have similar physical py characteristics and are substitutable Long and Short the same commodity that may have different physical quality attributes such as malt and feed barley Trading view is taken on the marketable value of that quality spread Geographic Spreads Long and Short the same commodity that is located in different geographic areas Arbitrage the location differential of the same commodity. This includes basis and carry trades 7

8 Three Structural Opportunities Index Money Distortion long passive investors in commodity markets are consistently creating structural distortion between the various exchanges around the world US Data Dominance Agricultural markets are obsessed with North American data but are very slow to react to information from the rest of the world Tight Credit - Tighter lending standards, Basel III requirements, higher margin requirements and just in time inventory management are all resulting in a higher return for those prepared to provide risk capital to commodity market. 8

9 Investment Philosophy, Investment Philosophy Only invest if there is a compelling return case Believe in an arbitrage approach punting the direction of markets is a mugs game Have a very strong framework for risk management Use a research-driven/fundamental approach to portfolio management Only operate in areas where there is a convincing argument that value can be realised Focus only on areas where a significant amount of experience and belief in edge exists Investments often held for a 3 to 12 month period which is beyond the time frame of most market participants 9

10 Trade Example Tight Credit LONG Physical Skim Milk Powder / SHORT US Class III Fluid Milk Futures Trade LONG Australian Medium Heat Skim Milk Powder (SMP) Physical SHORT CME Class III Fluid Milk Futures March-September 2010 Thesis In 2009, global uncertainty and a dramatic fall in commodity prices resulted in a temporary oversupply of milk powder and a disconnect between forward fluid milk prices and spot powdered milk prices US milk returns were some of the worst in history but were expected to recover in 2010 as the US Dairy herd contracts and milk prices improve as indicated by the premium in the US Class III milk futures forward curve. US Milk to Feed ratio was at an all time low and supported a significant contraction of the US Dairy industry Australian/ NZ milk prices were trading below the cost of production which resulted in a contraction of milk supply. A local oversupply of Skim Milk Powder provided the opportunity to buy and carry skim milk powder with minimal carry costs and sell into the higher forward curve in Futures Oceania Correlation Dec07 Sept09 =77% May08 Sept 09 = 87% Oceania Skim Milk Powder Pricing VS US Milk Futures (Milk solids equivalent 10%) USD/MT Trade Entry Trade Exit Oceania SMP CME Class 3 Milk Futures Skim equiv Execution Skim Milk Powder (SMP) can be purchased on the physical market from large milk powder producers and carried in AQIS approved, temperature controlled storage. SMP has a 2 year life span. SMP was marketed in late 2009 to local food companies and the export market US Class IIII Fluid Milk Futures are traded on the Chicago Mercantile Exchange (CME) 10

11 Trade Example Index Money Commodity spread Long High Protein Wheat / Short Low Quality Wheat LONG KCBT Wheat : SHORT CBOT SRW Wheat Key Risks Fundamentals Kansas City Board of Trade wheat futures are based on a high quality, high protein milling wheat known as Hard Red Winter Wheat (HRW). Chicago Board of Trade wheat futures are based on a lower quality Soft Red Winter wheat (SRW) CBOT carrying costs exceed that of KCBT Index Fund long positions are held primarily in CBOT futures, in the nearby end of the futures maturity curve. Both contracts are deliverable and therefore as maturity approaches, the high quality attributes of KCBT wheat futures result in it trading at a premium to CBOT. An additional attribute of being long quality wheat is a that extreme weather events, as seen in Australia, Canada, Russia and the Ukraine in 2010, typically results in less high quality wheat and more low quality wheat and spike in protein premiums. Historicals 10 year low: KCBT wheat futures 67 usc/b under CBOT Wheat Futures 10 year high: KCBT wheat futures 128 usc/b over CBOT Wheat Futures Bias for Kansas wheat futures to trade at a premium to CBOT at maturity Event Lever(s) Weather related disruptions to the northern hemisphere milling wheat crops Expansion in US SRW wheat/contraction of HRW planted acreage Fund flows favouring the more liquid CBOT wheat futures contract causing divergence of CBOT wheat futures from KCBT wheat futures Regulatory changes to either CBOT or KCBT wheat futures contract Opportunity This provides an opportunity to buy KCBT wheat futures equal to or less than that of CBOT wheat 9-15 months forward. High correlation of the two futures contracts results in low margining costs and an additional adverse weather kicker. This position is expected to be held for 6-9 months USD 1.60 USD 1.40 USD 1.20 USD 1.00 USD 0.80 USD 0.60 USD 0.40 USD 0.20 USD 0.00 USD 0.20 USD 0.40 KCBT Wheat Premium to CBOT Wheat USD/Bushel Trade Exit 4/0 03/2010 Trade Entry 4/0 04/2010 4/0 05/2010 4/0 06/2010 4/0 07/2010 4/0 08/2010 4/0 09/2010 4/1 10/2010 4/1 11/2010 4/1 12/2010 4/0 01/2011 Trade Exit KCBT Premium 4/0 02/2011 Trade Entry 4/0 03/2011 4/0 04/2011 4/0 05/

12 Trade Example Index Distortion / Tight Credit Geographic Commodity spread LONG ASX Milling Wheat (Aust.) SHORT CBOT SRW Wheat (US) Fundamentals Australian wheat is a premium quality wheat and viewed at trade entry date as undervalued relative to world wheat prices. CBOT wheat futures were also trading at a premium to world physical cash wheat markets Merricks held the view that proposed changes to the CBOT futures contract would encourage convergence of CBOT futures contract and prevailing cash prices would be successful. Large quantities of feed grains produced in the 08/09 year were expected to pressure lower end quality grains including CBOT wheat futures which are deliverable as Soft Red Winter Wheat, ultimately a feed grain. Added uncertainty was caused by the recent deregulation of the Australian Wheat industry which resulted in the local market bpricing in a risk discount into local wheat prices to account for potential infrastructure bottlenecks and shipping delays Key Risks Weather related problems in the Northern Hemisphere wheat crops Divergence of CBOT wheat futures from cash prices Opportunity Exploit the discount of Australian premium wheat to US wheat prices Hold position for 6-9 months Australian Basis Trade Exit Historicals Long term mean: A$6 ASX wheat futures over CBOT Wheat futures 6 year low: ASX wheat futures A$37 under CBOT Wheat Futures 6 year high: ASX wheat futures A$105 over CBOT Wheat Futures Seasonal Bias for Australian wheat prices to rise relative to CBOT wheat futures July-December Event Lever(s) Harvest pressure in the United States Quality issues with the US HRW (premium quality) wheat crop which h would reduce the world supply of premium wheat Further convergence of the CBOT wheat futures contract and world cash prices Trade Entry Basis 12

13 Geographic Commodity Spread NYSE Liffe/Winnipeg Canola Spread w LONG NYSE LIFFE Rapeseed SHORT ICE Winnipeg Canola Futures Fundamentals The EU is a net importer of Canola and is principally GM free which trades at a CAD 5-25/mt premium to GM Canola Canada is a net exporter of Canola and is principally GM After a severe winter, the EU is now suffering from drought in the largest Canola producing states of Germany, France and Poland. This is likely to lower yields and increase import requirements Canada is forecast to increase new crop Canola plantings by 20% this year which would result in a significant 20-25% increase in total production and set a new record. Historicals 6 year mean: +C$39/mt EU Rapeseed over Canadian canola futures 6 year low: C$27/mt EU Rapeseed under Canadian canola futures 6 year high: +C$106/mt EU Rapeseed over Canadian canola futures Historical data only relevant post 2005 introduction of EU biodiesel subsidies Trade Example North America vs. World Key Risks Rain arrives in Western EU and stabilises crop Disruption to Canadian Canola planting that lowers planted acreage Opportunity Enter long position in EU Rapeseed futures at below average premium to Canadian Canola futures Hold position for 4-8 months CAD CAD CAD Target Trade Exit Target Trade Exit EU Rapeseed vs Canadian Canola EU Rapeseed vs Canadian Canola Event Lever(s) Continued dry conditions throughout Western Europe Confirmation of large frost affected yields in Germany and Poland (from winter weather event, yield loss only determined at harvest) Rapid progress in Canadian Canola plantings CAD CAD CAD 0.00 Trade Entry Trade Entry CAD

14 Disclaimer This presentation is prepared and provided by Merricks Capital Pty Limited (ABN AFSL ) on a confidential basis for use only by the recipient (as a wholesale client under the Corporations Act 2001 (Cth)) and should not be forwarded to others. The information contained in this presentation is of a general nature only and is not to be taken to contain any financial advice or recommendation. This presentation is neither an offer to sell nor a solicitation of any offer to acquire interests or any other any investment. Neither Merricks Capital Pty Limited nor its directors, officers, employees, agents or associates, or any party named in this presentation guarantees the performance of the Funds. Past performance is not a reliable indicator of future performance. 14