[Zentric]

When the world gets crazier, basic food staples (e.g., wheat, coffee, soy beans, orange juice) could easily become scarce and expensive. And the same could also go for other essential, but non-food, commodities - such as steel, copper, silver, cotton, timber, rubber, oil and natural gas.

Looking at at the newspaper's business section, I see I can buy commodities futures for most if not all of the above, with delivery dates far off into the future. So I'm thinking, as a hedge, I should buy that stuff now, for delivery later.

Of course, I'd never need to actually exercise any of my futures contracts - however, if orange juice five years from now goes to $10 a tin, then the profitable sale of my frozen orange juice contract will most certainly allow me to purchase my customary share of frozen orange juice from the grocery store.

This plan seems so good and simple, but I fear an economic meltdown could destroy the commodity exchanges where I hold my contracts, thus leaving me holding worthless paper.

If I buy futures for protection against my worst fears, how do I make sure I stay protected almost no matter what happens?

[blukatzen]

Hi Zentric

I was just thinking of your orange juice crop, and if it's from Florida, you had better watch out, as with crop futures, Global warming is going to be a "wild card" in all of this.
With hurricanes as a given due to changing weather patterns the last few years that has ramped up hurricanes in the Gulf, do you really think that the orange crop will be sustained after a few years? I think it may get decimated, year in and year out.
With the rest of the futures in non-perishables, that is a different story of course.

Good luck with your investments..

[backstop]

Zentric -

"If I buy futures for protection against my worst fears, how do I make sure I stay protected almost no matter what happens?"


With respect,

you cannot make sure you stay protected -

there are no boltholes from PO + GW + Water depletion + Soil depletion + a sick battery chicken in Kuala Lumpur.

Attempting to profit by speculating on foods is about as low as it gets ethically,
and would injure your karma (or luck as we in Europe call it) very badly.

Try investing in some well-chosen land and helping to maintain those around you -
and let go of the conditioned craving for security-via-money.

It's a dangerous delusion.

regards,

Backstop

[Chaparral]

I'd be very careful. You'd want to time your entry point for each commodity with the seasonal lows or at points where the commercial hedgers are unusually (90%-95%+) long. I'd also worry about drawdowns during unusual times (i.e. birdflu worries causing weakness in soybeans or economic recession causing a collapse in gold/silver/crude). It's been my experience that one would want to maintain upwards of twice as much margin on hand as is required for ultra-long term positions. That means that if I was to go super long term long on corn or soybeans (no way in hell right now!!!!) and the margin requirement for one contract was 1148.00 USD, I'd probably want closer to 2500.00 USD to prevent margin call and forced liquidation by your broker. I'd put a commodity futures strategy in a distant third or fourth place behind organic gardening/PO skills, gold & silver, and building community. If you have the money, its worth a shot but if you don't have the money, go with the first three.

Of course, if you did go long on FCOJ and a couple of Cat 5s took out Florida, you'd make a nice fat sum. If the hurricanes stayed away but low carb diets gained even more popularity, you'd lose

[Zentric]

Backstop: With respect, I'm referring to ensuring an adequate supply of food and other commodities for myself, my family and friends by making raw material purchases today that will, in turn, allow me to maintain my access to more-finished products (based on these same raw materials) in the future. I'm referring less to profiteering and more to my idea of the preservation of a comfortable, non-consumerist lifestyle.

Blukatzen: What you said brings up a paradox - on one hand, if global warming blitzes the orange crop, then the value of my frozen orange juice contract rises, and with its proceeds, I could indeed buy myself some frozen OJ at the grocery store - regardless of its price.

On the other hand, if the world goes crazy like I think it will, then maybe force majeure would apply to many of my options contracts. In other words, chaos and calamity would effectively prevent the delivery of the commodities, as contracted. Hence, the contracted commodity-provider is lifted from the legal burden of providing what he reasonably cannot provide - which could, in turn, prevent me from maintaining my targeted basic lifestyle.

Still, I wonder, how major a force would we be talking about before force majeure would generally be expected to apply?

[teemu]

$this->bbcode_second_pass_quote('Zentric', 'L')ooking at at the newspaper's business section, I see I can buy commodities futures for most if not all of the above, with delivery dates far off into the future. So I'm thinking, as a hedge, I should buy that stuff now, for delivery later.

[Zentric]

Thanks for your replies, teemu and Chaparral.

If, again, my goal is to buy today the items I wish to take delivery of tomorrow, is there a commodities-based ETF available that would effectively accomplish this for me?

In other words, I'd be looking for a fund that, instead of owning shares of copper miners (orange growers, etc.), holds futures contracts of varied maturities and of varied commodities.

Thus, if I buy into this fund, much like Southwest Airlines did when it bought jet fuel futures before the price of kerosene skyrocketed, I might be able to shrug off food and commodity inflation in the years to come.

[pup55]

If you had invested $1000 in the Jenison Natural Resources Fund (PNRZX) on Jan 1, 2005, your shares would have increased in value by $666 by Dec 31.

The fund is no-load, has no minimum investment and has a very low expense ratio, so perfect for joe schmoe to invest in energy.

If you were an average driver, with a 20 mpg vehicle, driving 10,000 miles, you would have paid an additional $625 for gasoline last year ($1.25 per gallon price increase vs. 2004). So, in essence, you would have been unaffected by the fuel price increases last year if you had done this.

You could have accomplished the same thing by investing the minimum $1000 in Franklin Gold and Precious Metals (FRGOX) which also is no load, but expenses are a little higher, and the mutual fund company, Franklin, is more reputable. This fund went from 17 to 27 for an increase of $588 per thousand invested.

If you had invested in the actual commodities during this time you may have made a lot of money because of the leverage effect, but you could also very well have lost it all if the market had turned on you at some point. Also, most commodity accounts require a bigger investment up front and commissions on each trade.

In other words, investing strategically to avoid getting bit by increasing energy costs is a good idea, and can be done safely without paying a lot of commissions, if you let a professional handle it. You can get in with very little up front, avoid a lot of the risk and can brag about it at the end of the year.

Disclaimer: Past performance is not an assurance of future results. Also, never take investment advice from anyone who has a job.

[MrBill]

$this->bbcode_second_pass_quote('pup55', '
')Disclaimer: Past performance is not an assurance of future results. Also, never take investment advice from anyone who has a job.

[Chuck]

$this->bbcode_second_pass_quote('pup55', 'A')lso, never take investment advice from anyone who has a job.