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Manager focus: George Lee

Although food prices have fallen from their peaks in last year, major food grain prices are still above average. The World Bank reports that although international food prices have fallen, local food prices in many countries have not fallen. Maize is 50% more expensive than its average prices between 2003 and 2006, while rice prices are 100% higher.

“It is very possible that we will see another food crisis,” says George Lee, the manager of the CF Eclectica Agriculture fund. “Crop prices will go up again.”

Lee says levels of inventory are already “very low”: a drought in one of the major soft commodity producing countries could lead to further harvest shortfalls and trigger another crisis.

Farmers, says Lee, have felt the impact of the credit crisis. “It was more difficult for them to access credit from banks.” So far this season, reduced access to financing, lower year-on-year crop prices, less land under acreage and a late spring in Europe have resulted in farmers buying less fertiliser and planting less.

He expects the total world harvest to be 5% lower than last year, which is likely to lead to high food prices again.

Prices for soft commodities already rose 5% in March, compared with last month. This was led by corn and soybeans, and global production estimates for these continue to be affected by bad weather in Argentina and southern Brazil. Early indications also suggest that American farmers will sow 3% fewer acres than in 2008.

In the first half of this year, Lee expects prices for soybeans to rise as a result of a drought in South America, affecting soy bean producers. Palm oil prices are likely to go up too, he adds, because of a shortfall in supplies of palm oil in Malaysia and Indonesia.

Over the fourth quarter of 2009 or the first quarter of 2010, he expects wheat to become more expensive again.

“People tend to forget that the demand for food commodities remains, even in times of economic crisis. Food commodities only fell by 2%, while the demand for oil fell by 5% and copper by double digits.”

He says his agriculture specialist fund was basically flat in March, registering a loss of 0.2%. “At the end of the first quarter the fund was down 2.8%, significantly ahead of the MSCI World index, which despite producing one of its sharpest two week rallies in seventy years in late March, was still down 6.2% in sterling on the year.”

Lee says his portfolio was down because most of the shares were oversold last year. “There was a commodity bubble and a lot of speculation in the sector,” he adds.

“In the second half of last year, investors had to sell a lot of shares as they were struggling to meet the demand for liquidity.” He says the £91.6m fund, which invests in equities, was also affected by broader equity market movements.

“Shares from those companies are cheap because they aren’t discounting recovering profits.”

Lee says that soft commodity prices will rise, benefiting companies that the fund invests in. “Less supply of soft commodities will be bullish for prices over the next year, particularly as demand for soybeans from China and corn from the US ethanol industry continues to be strong.”

It was a combination of this “more optimistic outlook”, a general willingness to increase risk and attractive investment opportunities that made him reduce the level of cash. Lee’s fund, which had a cash level of 19.4% by the end of March, is now fully invested.

When selecting holdings, Lee tends to start with a macroeconomic overview. He considers developments in countries that play a major role in agriculture, crop prices and inventories. For example, at present, corn inventory is higher than sugar. But Lee also considers other factors such as exchange rates, export bans and export tariffs.

The World Bank also has similar expectations. Two weeks ago, it published an update on the Global Food Crisis Response Program, stating that the facility has been increased to $2 billion (£689m) in April to address the severity of the food crisis.

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