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Long Live the Commodity Super Cycle
INDEPENDENT. OBJECTIVE. RELIABLE.
Long Live the Commodity Super Cycle
INDEPENDENT. OBJECTIVE. RELIABLE.
1
It is our view that demand for commodities will continue
to be very strong and that the prices of most commod-
ities have a very long way to go before they can insure
adequate supply and some semblance of demand con-
servation. While many commodities have already risen
to historic price levels, an interesting phenomenon has
surfaced that suggests that prices have not reached high
enough levels to achieve consistent supply. For exam-
ple, crude oil prices have settled in at roughly four or
five times the levels seen from 1992 through 2000, yet
alternative energy sources, such as natural gas, solar and
wind power, are still underutilized. In the food protein
area, nearly historic high beef prices have failed to provide
beef producers with a consistently profitable environ-
ment due to surging feed costs, spiraling regulation and
other increases in production costs. Similarly, the U.S.
dairy industry remains in the midst of a decade-long
collapse because retail prices for milk, butter and cheese
are rarely offering producers an acceptable profit in the
face of rising. While we aren’t suggesting that all com-
modities will take on the status of rare earth metals, key
commodities like grains, metals, energies and livestock
are destined to become “rarer” in the future, and the cost
to produce these commodities is sure to escalate. This in
turn should ensure these commodities will continue to of-
fer investment opportunities for at least another decade.
The case for commodities continues to burn brightly, as
evidenced by the growing volume of trade since the sub-
prime crisis despite disappointing recoveries in mature
economies. The total volume of commodities traded
bottomed out quickly in 2009, the depths of the financial
crisis, and then posted impressive gains in 2010 and 2011.
In contrast, the total volume of stocks traded on the NYSE
continued to fall in 2010 and 2011. Total money under
management in commodities saw only a minor decline
in 2008 (the first time since 2000), and from 2008 to
September 2012, it posted a very impressive 63% gain!
Energy – A Leading Indicator of Commodity DemandIn the wake of the sub-prime crisis and then again in 2011,
the commodity markets were besieged with predictions
that the Commodity Super-Cycle was coming to an end.
Some analysts even predicted that many commodities
were poised for a multi-decade decline, as the damage
to the world economy in 2008-2009 had brought forth
a peak in demand. The commodity bears were further
emboldened in 2011 when four additional, epic-type
disasters, the Fukushima earthquake and tsunami, the
threat of Greece defaulting, the U.S. debt debacle and
talk of a Euro zone failure, weighed on the world econo-
my. However, global energy demand, which we view as a
leading indicator for overall world commodity demand,
Money Under Management In Managed Futures
337.
133
4.7
328.
331
4.3
0255075
100125150175200225250275300325350375
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910
Q411
Q111
Q211
Q311
Q412
Q112
Q212
Q3
Bill
ion
USD
Source: barclayhedge.com
Long Live the Commodity Super Cycle
2
INDEPENDENT. OBJECTIVE. RELIABLE.
continued to grow year on year through the sub-prime
crisis and has moved beyond several previous “peak”
demand plateaus. Instead of looking for energy demand to
top out, the U.S. Energy Information Agency is forecast-
ing it to grow an average of 1.6% per year out to 2035.
The Importance of Price Discovery It takes a long time to shift entrenched commodity
production practices. Those who stand against specula-
tion in commodities think that long-term shortages can
be recognized without signals from the marketplace,
but what really boosts production or curtails demand
better than higher prices? The notion that the world
would eventually have to diversify away from petro-
leum-based energy would have gotten nowhere without
the periodic energy flare ups in energy prices over the
past 40 years. And while speculation can accentuate
price movements, global oil production wouldn’t have
responded as quickly and as convincingly without the
market providing an incentive. Without lofty oil prices
there would have been no incentive to develop Ca-
nadian tar sands, and the U.S. wouldn’t be seeing its
domestic oil production expand rapidly as it has from
the Bakken formation in North Dakota and Montana.
In the grain markets, the speculative reaction to
the 2012 drought may have accentuated the rise in
grain prices, but without that early warning signal
from the futures markets, the ethanol and livestock
sectors might have burned through enough corn to
result in a multi-year supply shortage. The sharp es-
calation of grain prices prompted an expansion of
global grain planting area that was absolutely neces-
sary to make up for the lost production in the U.S.
Another example is the natural gas market. Stubbornly
high natural gas prices during in the late 1990s ushered
in an expansion in production. This eventually resulted
in an excess supply. Subsequent speculation has driven
natural gas prices down sharply, especially compared
World Total Primary Energy Consumption (Quadrillion Btu)
300
350
400
450
500
550
600
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Sources: EIA Internation Energy Statistics and International Energy Outlook 2011 (2012-2015 are Forecasts)
Quarterly US Crude Oil Production vs. WTI Crude Price
4.5
4.8
5.1
5.4
5.7
6.0
6.3
6.6
6.9
7.2
7.5
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Prod
uctio
n - M
illio
n B
arre
ls /
Day
0
14
28
42
56
70
84
98
112
126
140
USD
/ Barrel
US Production WTI PriceSource: EIA Short-Term Energy Outlook 2012Q3 -2013Q4 are Forecasts
Long Live the Commodity Super Cycle
3
INDEPENDENT. OBJECTIVE. RELIABLE.
to other energy sources, and that in turn has hastened
a the switch away from petroleum-based feed stocks
to natural gas. Without the distinct price advantage, it
would probably have taken decades for natural gas to
become as important as it has for electricity generation.
Given the size of the investment required to shift glob-
al energy sources, it would be folly to assume that
some other mechanism, such as one supported by
taxpayer money, could have achieved that transition.
The U.S. government has already wasted billions in
its attempt to speed up the transition to solar energy
with little to show for it. Full-scale implementation of
solar and other alternatives will probably only come
from higher energy prices and the potential for signif-
icant profits for those developing the technology.
Government Involvement in Commodity SupplyAnother artifact of the sharp escalation in commodity
prices between 2005 and 2008 was that many countries
began to build or expand strategic reserves. Initially,
strategic reserves were limited to petroleum and gold, but
countries like China, India and Russia have long main-
tained grain reserves as well. With its breakneck growth,
China seems to have taken domestic stock-building to
new heights. While individual governments (the U.S.
included) see strategic reserves as a way to blunt short-
ages and avert rapid increased in prices, a global push to
stockpile could lead to the need for even larger global
production as more output is set aside for future use.
In reality, historically high commodity prices and the
2012 drought have prompted many nations to move
beyond mere stockpiling and search for even more cre-
ative ways to commandeer foreign commodity supply:
• Saudi Arabia, Egypt, Kuwait and South
Korea have leased lands in sub-Saharan
Africa for growing crops. Russia has leased
land in Ukraine for the same purposes.
• For some time China has been looking to Africa
for mineral resources, but more recently it
has been making significant investments in
agricultural production there and elsewhere.
• Australia approved a Chinese company’s bid
for a giant cotton farm this past August.
• Ukraine agreed to a 3 billion dollar credit loan
from China in order to purchase inputs to boost
production to supply China with corn.
• Chinese investors are making headway on a 1,215
mile railroad investment for moving soybeans
grown in Mato Grosso, Brazil to port. This is the first
proposed project for that area in the last 100 years.
Government involvement in commodities has at times cre-
ated a wave of buying that has easily dwarfed the activi-
ties of largest funds and commercial traders. Speculator
buying and selling can accentuate volatility and move the
market, but without open and actively traded futures mar-
kets, there would be nothing to countervail the govern-
ment buying. As they currently stand, active, deep and liq-
uid futures markets are a formidable countervailing force
to large governments, large funds and large producers.
As with most situations in a capitalist market structure,
Long Live the Commodity Super Cycle
4
INDEPENDENT. OBJECTIVE. RELIABLE.
multiple buyers and multiple sellers are always preferred
over backroom deals and under the table transactions.
IV. Ever-Increasing Relevance of Commodity Futures to Global Trade
Commodity futures have become increasingly important
to the global economy as their role in helping companies
reduce their risk from price volatility has grown. Futures
and options are used by corporations to offset price risk
for commodities. This leaves them in a better position to
concentrate on their core businesses and is much more ef-
fective than relying upon luck to manage their input costs.
Producers and end users of commodities are more in-
volved than ever transferring risk to those who want to
accept it. Open interest in options has expanded dramat-
ically in the last decade. The use of these instruments as
price insurance has been widely accepted as an essential
for doing business for both producers and end users.
New Exchanges Mean More OpportunityExchanges have been popping up around the world as fu-
tures and options have grown more popular and produc-
ers and end users have become more sophisticated. Black
Sea Wheat, Malaysia Palm Oil and Australia Wool are all
examples of local markets that have benefited from the
availability of futures trading. Local producers and global
consumers can use these markets to hedge their price risk.
Exchange Volume TrendWhile total futures and option global volume may be
down for 2012, the trend over the past five years has
been very strong. The exchanges with some of the stron-
gest growth include the Multi Commodity Exchange of
India, Dalian Commodity exchange in China, the Shanghai
Commodity Exchange and the Singapore Exchange. In
the first half of 2012 the CME Group was still the vol-
ume leader with 1.55 trillion contracts traded, but there
were four other exchanges with volume greater an 1
trillion contracts during that time frame and 17 exchang-
es around the globe with volume over 100 million.
RegulationsThe events of the last several years have clearly put the
futures industry on a fast track toward even more intense
regulation, but the most significant development is the
push toward insuring customer segmented funds. The
China Soybean - Net Imports / Exports
-10-505
10152025303540455055606570
86 88 90 92 94 96 98 00 02 04 06 08 10 12Crop Year Beginning
Mill
ion
Met
ric T
onne
s (M
MT)
Most Recent: 62.75 As Of 12/11/2012 Source: USDA
Net Imports
Net Exports
Long Live the Commodity Super Cycle
5
INDEPENDENT. OBJECTIVE. RELIABLE.
industry is considering the implementation of something
similar to SIPC, the Securities Investors Protection Cor-
poration. While fraud issues are tough to detect, removing
the “customer funds” financial risk through the use of
insurance would go a long way towards restoring confi-
dence in the futures industry. Indeed, the combination
of intense regulatory scrutiny and this type of financial
backstop should finally bring commodities to an invest-
ment class standing. Tighter regulations should benefit
the industry in the long run, especially since swap activity
will now be monitored more effectively in the wake of
swap trades becoming part of organized exchanges. This
in turn means that those instruments will be regulated
to the same extent as futures and options. With recent
news that the Intercontinental Commodity Exchange
was poised to purchase NYSE/EuroNext, it would appear
that commodity markets are poised to take on a more
dominant role than equities in the years ahead. Some
economists think that the net result of the sub-prime
crisis is an ongoing rotation from financial assets into
physical assets, especially when one considers the linger-
ing negative influence from record global debt levels.
ConclusionCommodities have only just begun to receive the respect
they have been denied over the last 50 years. In the past
some parties have suggested that commodities shouldn’t
be an asset class because they were too critical to the
global economy and they thought allowing investment
and trade in commodities would result in inflated prices.
In reality, commodity prices need to be free adjust rapidly
in order to register concern about upcoming supply, to
foster expanded production capacity through technology,
and perhaps most importantly, to increase the world’s
conservation of its somewhat dear natural resources.
With rapid rise in the standards of living in China, South-
east Asia, India, the Middle East and Africa all a long
way from running their ultimate course, interest and
trade in commodities looks to be an entrenched trend.
Surging interest in commodities by investors and gov-
ernments, increased volatility from weather issues and
the ongoing expansion of global commodity production
areas (beyond ideal production zones) probably means
that the battle between supply and demand will at times
burn white hot with severe shortages, ultimately giving
way to temporary overabundance. In the end, one of the
most positive results of the sub-prime crisis might be that
the pause in global growth allowed for a minor catch up in
supply for some commodities and that in turn could delay
what we think will be an inevitable inflationary end game.
Change is positive and necessary, especially when one
considers that commodities are a critical component
of the global economy. A recent Bloomberg survey
Vegetable Oil - Major Consumers
30.584
17.994
13.067
0
3
6
9
12
15
18
21
24
27
30
33
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12Crop Year Beginning
Mill
ion
Met
ric T
onne
s (M
MT)
China India United StatesMost Recent: As Of 12/11/2012Source: USDA
Long Live the Commodity Super Cycle
6
INDEPENDENT. OBJECTIVE. RELIABLE.
put global investor sentiment at its highest level in 18
months. That combined with the slow but sure progress
in handling the travails in the Euro zone suggests that
smoother economic waters lie ahead. In addition, Chi-
na’s economic outlook is beginning to improve having
successfully navigated a transfer of national power, but
more importantly having halted a tight monetary stance
that had been place for almost 15 months. Therefore the
world’s biggest physical commodity consumer should
be expected to see a recovery in commodity demand.
In the end, improving economic confidence, historically
high global money supplies and no way out but forward
from global debt loads could mean most central bankers
will be forced to keep their foot on the gas in 2013. If
so, commodity consumption trends, especially with the
growth in China, India and Southeast Asia, should mean
a continuation of the longer-term uptrend in commodity
trading volumes and even higher commodity prices.
Insider Market AdvisoryIf you would like to learn more about what events are
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looking at our IMA, where we pinpoint short, medium
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Long Live the Commodity Super Cycle
7
INDEPENDENT. OBJECTIVE. RELIABLE.
About Us
Daniels Trading - Independent. Objective. Reliable.Daniels Trading is an independent futures broker-
age firm located in the heart of Chicago’s financial
district. Established by renowned commodity trad-
er Andy Daniels in 1995, Daniels Trading is built on
a culture of trust committed to the firm’s mission
of Independence, Objectivity and Reliability.
IndependentWe are proud to be Independent, offering you
the freedom and flexibility to choose the tech-
nology and clearing arrangement that’s right
for you, while providing the must-have resourc-
es and personalized support you deserve.
Our Independence creates more choices for you than
any single clearing firm can provide. We’re the broker for
your future that can provide the flexibility, choice and
responsiveness the 21st century global markets demand.
How independent are we? You can have multiple accounts
with multiple clearing firms… all through Daniels Trading.
ObjectiveOur independence allows us to be objective in de-
termining the best mix of technology, solutions
and guidance that makes sense for you. You’ll ben-
efit from our objectivity in two distinct ways:
Objective Solutions – Too often today’s traders are
limited by the rigid confinement of singular offerings by
individual firms. We’ll work with you to discover and pro-
vide the objective solutions that are the truly “best fit” for
you…not just cleverly packaged one-size-fits-all answers.
Objective Guidance – Our objective guidance
starts with our two most important Service Prin-
ciples - “Listen First” and “Talk Straight”. Whether
you are looking for very active one-on-one guidance
from a broker or simply a single point of contact for
your self-directed trading, you’ll find us informed, re-
spectful and objective in the guidance we provide.
ReliableWe believe that reliability is crucial to attaining client
satisfaction. Reliability is vital to every aspect of our
relationship, from the execution of electronically trans-
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as the solid foundation for your satisfaction as a client.
dt Independent Advantage - Our proprietary suite
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mentary basis regardless of account size, trading
volume, commission rate or selected clearing firm.
Long Live the Commodity Super Cycle
8
INDEPENDENT. OBJECTIVE. RELIABLE.
DisclosureTHIS MATERIAL IS CONVEYED AS A SOLICITATION FOR
ENTERING INTO A DERIVATIVES TRANSACTION.
THIS MATERIAL HAS BEEN PREPARED BY A DANIELS
TRADING BROKER WHO PROVIDES RESEARCH MAR-
KET COMMENTARY AND TRADE RECOMMENDA-
TIONS AS PART OF HIS OR HER SOLICITATION FOR AC-
COUNTS AND SOLICITATION FOR TRADES. DANIELS
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INDEPENDENT. OBJECTIVE. RELIABLE.