listeningin october 18, 2010 hard assets, hard...

As the Fed worriedabout deflation andreadied QE2 for launchlast week, the prices ofcorn spiked and cottonchanged hands at pricesnot seen since the CivilWar. If you detect apotentially enormouswhiff of inflation, fromMelanie Bialis’ perspec-tive, well, you justmight be catching on —slowly, but catching onat least. Melanie is thefounder and chief exec-utive of Boxcar CapitalManagement. TheSanta Monica, CAbased-firm runs a cou-ple of commodities-focused hedge fundsdedicated to the propo-sition that hard assets —especially those, asMelanie puts it, withutility — are the likelybig beneficiaries of all of the money being pumpedinto the system — but that riding that wave willrequire employing active commodities strategies.Happily for her clients, Melanie has packed anawful lot of experience, primarily in managingcommodities and futures, into her 12 years in thehedge fund industry—and it shows in her funds.They have racked up double and triple-digit gainsover the last several years since inception, andMelanie is just getting warmed up. Listen in.KMW

You have been say-ing we should talkabout investing incommodities for awhile — and one leadstory in the WSJthis week was aboutthe grains surging,another about cot-ton breaking arecord. Are we toolate?No, there’s more excite-ment to come. One ofthe interesting thingsabout the grains is howerratic and volatile thetrading can be. Yet thegrains have been onearea this year where theprice actually hasmoved based on supplyand demand.

How strange!Absolutely. A realanomaly. But there

have been a number of factors coming togetherfor several years to produce this uptrend. Backin early 2008, there was a flurry of concernabout food inflation — remember Costco limit-ing customers to buying just one bag of rice?But that was quickly alleviated by the sharpdrops in the prices of all commodities in thefinancial crisis. Well, I think that is going toturn out to be an example of a big correction incommodities actually being bullish for the longterm. Current stocks in some of the grains,

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especially corn, are incredibly low — the U.S.corn stocks-to-use ratio is projected to fall to6.7%, the lowest since 1995-’96. Starting lastyear, the USDA basically had been predictingcorn yields for 2010 coming in at perfection. Sothey have been scaling back, in every reportthey have issued this year, their estimates ofwhat they think grain yields are going to be.Last Friday [Oct. 8], they decreased their cornyield estimate significantly, from 162.5 to155.8 bushels an acre, which came as a bigshock to the market. I believe it was the biggestrevision since 1995.

Is this like the oilindustry or mort-gage banking, whenwe find out onlyafter the fact thatthe inspectors wereasleep at theswitch? It’s interesting. I sus-pect it’s more of a situ-ation where the USDAdidn’t want to comeout immediately andsay, “Wow, earlier wewere really just pro-jecting based on lastyear. But we were wayoff the mark.”Instead, they’re making this a slow bleed; com-ing out with revisions every time they publish areport. And this was a big one. It seems like thenumbers will continue to point to lower andlower stocks and, potentially, lower yields. Sowe’re now having these fairly large moves in thegrains. Friday was a limit-up day across theboard — and that is despite the fact that wearen’t having a major weather disruption. If wehave a major weather disruption, we’re reallygoing to be in trouble. Prices could go a lothigher.

Yikes. But before we go too far down thatroad, let’s establish your bona fides.You mean, how someone with a psych degreefrom NYU ended up running a couple of com-modities-focused funds? I actually started outas a healthcare equities analyst out of school,working at hedge fund Oracle Partners, where alarge focus of my job was identifying govern-ment policy changes and how they wouldimpact trends within the healthcare servicessector. Larry Feinberg at Oracle was really instru-

mental in helping me understand how macroevents happening in Washington and policychanges would be absorbed by the markets —often in ways I would not have expected. Thatexperience has been very helpful to me, foridentifying trends in government policies andtheir impact on the global commodities, cur-rencies, and bond markets, as well as on equi-ties. Probably most importantly, Larry taughtme that you have to pull yourself aside some-times as an investor. You can’t get caught up inwhether the policy is right or wrong, whetheror not it will happen, or how long you think it’sgoing to stay around. The right question is how

will it distort the mar-kets? Ethanol is a goodexample. When theEnergy Act was passedin 2007, I think a lotpeople said, “This is aterrible policy, so I’mnot investing in anycompany, or in thegrains, that will bene-fit from it.” But theyshould have pushedthat away and asked,“Are they really goingto change this policyanytime soon?” And ifnot, looked for ways itwould distort the mar-

kets. What I really learned at Oracle with Larryis that you have to focus on the variety of thingsthat can happen not what should happen — andoften markets can react in perverse ways.

I certainly won’t argue that. How did youmake the leap from Oracle to commodi-ties?Well, around 2002, I wanted a bit of change. Myfather, Gary Bialis, has been a commodities trad-er most of his life. So I went to work with himto learn a bit more about the futures business.

You do have a talent for understatement—What should I say? We ran a managed accounttogether for a while and then I decided I wantedto go off on my own. After running managedaccounts for a couple of years, I launched BoxCar Capital, my global macro fund, in late2007, looking for long-term capital gainsthrough exposure to commodities, currencies,and interest rate futures and options. A yearlater, I added Back 40 Capital, my long-biasedcommodities fund, to take advantage of what Isee as bullish global trends in commoditiesmarkets.


“My overriding beliefis that, long term, the dynamics are in

place for a real need to own real assets —

and commoditiesfit that bill.”

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“Box Car” and“Back 40”? Are youtrying evoke theromance of hobosand America’sagrarian past?Well, “back 40” is afarmer term referringto an undeveloped plotof land on a farm (gen-erally 40 acres) thatthe farmer can use forvarious crops or graz-ing. And a railroadboxcar used to be themost versatile meansof transporting com-modities, carryingeverything from cornto iron ore.

You started Back40 at the end of’08? Wasn’t thatquite a leap, in themidst of the finan-cial crisis, whencommodities priceswere being savaged as institutionalinvestors were violently disabused ofnotions that they had diversified in com-modities? Not really. That’s where the appreciation forhistorical cycles in commodities that my fathertaught me proved invaluable. The second quar-ter of ’08 was very tough quarter for me. Myglobal macro fund was down 4% or so, because Iwas short commodities — a little early, obvious-ly — and they were very much going against me.But what really struck me was that some of myinvestors weren’t upset that I was down 4% thatquarter; they really thought of me as a com-modities manager and viewed their investmentswith me as an inflation hedge. That got methinking about doing a long-biased commodi-ties fund. Then, in the third quarter of ’08, weclearly had a huge correction in the commodi-ties space —

A wipeout, it’s fair to say, which had mosteverybody swearing off risk in any form —making it a very unusual time to start upa new fund, especially in commodities. Except, as I said, that I really benefited from myfather’s many years of experience, his havingseen many cycles in these markets. He taughtme the importance of historical research incommodities, which proved priceless when

things happening in the commodities marketsstarted unfolding similarly to how they did inthe ’30s. In fact, late 2008 saw the largest col-lapse in almost all of the commodities since theperiod of 1929 to 1932. Bad as the wipeout was,the one thing I found very interesting at thetime was that commodities were one asset classthat you very much could argue would benefit,long-term, from the credit crisis — from a sup-ply and demand standpoint.

How so?The markets had crashed just when the pricesof some metals and energy were getting to lev-els where it was going to become economic tobring on new production. So all of a sudden, alot of new production was taken off the drawingboards; a lot of new mines tabled. On the Agside, farmers suddenly had difficulty accessingcredit, so the usual supply constraints — heavytaxes, licensing, environmental, labor andequipment expenses — were made even worse.On the demand side, you had (and still have)the issue of central bank money printing, com-petitive currency devaluations and the poten-tial for a rush to hard assets. Essentially, Idecided that with prices representing very goodvalue, on a long-term basis, and with the crisisacting as a long-term positive for both supplyand demand dynamics, it was a good time to


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start a long-biased commodities fund.

It didn’t bother you that institutional fundflows were enormously negative at thatjuncture as the herd belatedly discoveredthat all correlations go to one, even on“passive” commodities, in a crisis?Sure. This space is never safe when we havevery correlated markets. You can look at 2008and see that gold held up until it was sort of thelast commodity standing, but when still moreliquidity was needed, it had a very sharp selloff,too. But my overriding belief is that, long term,the dynamics are in place for a real need to ownreal assets — and commodities fit that bill.

You mentioned seeing a lot of similaritiesbetween 2008 and the Crash of ’29 incommodities? Despite the enormouschanges in the markets, and the world?Yes. For instance, wheat, which (other than cof-fee) was the first commodity to top out in ’08,was also the first one to signal big problems in’29 — after a crazy parabolic move up very muchlike the recent experience. There were all sortsof parallels in things like price technicals, too.The history just really seemed to be rhyming allthese many years later. It didn’t seem to matterif it was because there were so many passiveinvestors in the market, as happened in ’08, orbecause a lot of speculators were way over-leveraged, as they were in the Crash. It justseems that when prices get so far out of whack,people flee for the exits. The details change,but human nature stays the same. In a sort ofstrange way, I found the steep correction in ’08comforting. One of the things I had always been

nervous about before launching my firm wasthat I had only started in the commoditiesworld in 2002, and so I had never lived througha major commodities correction. Then I did getto see one.

I’d file that under “Be careful what youwish for!”I wouldn’t say it was fun. But I do think volatili-ty and corrections are a very important part ofthe business to understand. It was definitely avery good experience to get to see what 2008had to offer. And when I did, knowing how tointerpret what happened against market histo-ry, as my father taught me; sort of layering thaton the technicals and the fundamentals, wasvery helpful in making me feel all right aboutbuying commodities — some of them at very lowprices, in late ’08 — even though it seemed likethe world was coming to an end. It really pro-vided a buffer to me to be able to think, “Okay,we’re not in as bad a shape as we were in the’29 to ’32 period, and yet prices have collapsedby more. Also, we have all these potentialdemand drivers out there in these emergingmarkets that didn’t exist back then.”

And now? Your commodities fund is upover 100% over its short life, but yourglobal macro fund has been strugglingagain this year. It’s off around 4%, isn’t it,even though it’s still doing pretty okay, upover 30% since inception. Global macro is frustrating again. I would arguethat in 2008, there was this disconnect; youcould see these problems in the system, butprices were slow to react. Once they did,though, it ended up being a very swift reaction!Currently, we’re again seeing a lot of diver-gences where the prices actually don’t appearto be following the fundamentals. And one ofthe big reasons, I would argue, is the govern-ment involvement. The disconnect youbrought up between my commodities fund andmy global macro fund reflects that. When youlook at Treasury yields, they’re forecastingdeflation to some extent. But if you look atsome of the commodities, the action has beenincredibly inflationary. One of the indexes Ilook at is the CRB RIND index [see chartabove]. It tracks commodities that are not trad-ed in the futures markets, everything from but-ter to burlap, hides, tallow. It recently made anew high, above the 2008 highs. What’s espe-cially interesting to me is that in a lot of waysthe CRB RIND is representative of real


Source: Bloomberg

demand, becausethose commodities aretraded in the realworld, away from thefutures markets andthe swap markets thatare being influencedby the passive fundsand all of those things.So you really are see-ing strong demand;what looks like infla-tionary signs in thecommodities market.Yet you’re seeingincredibly low yieldson Treasuries, whichare pointing towardsdeflation. Both can’tbe right and some-thing is going to haveto change.

You’re betting, clearly, on inflation —Yes, via real assets. It seems pretty clear to me,with sovereign debt soaring worldwide, politi-cal pressure is likely to lead to continued moneyprinting — which means paper currency devalu-ation against real assets. The U.S. government,to cite the obvious example, has over $13.5 tril-lion of debt at last count, over 95% of GDP. Yetit is pursuing an unprecedented loose monetarypolicy, keeping Fed Funds at 0%-0.25% for an“extended period,” — and from all indications isabout to embark on QE2. Even without QE2, theTreasury and the Fed have already increased themonetary base by over 125% since the fall of2008, a spike that may potentially translate intosignificant inflation over time. One of the issuesfor my macro fund, Boxcar, in the most recentquarter, was that a lot of the trends I have beenexpecting have not really materialized — yet. Iexpect real competitive currency devaluations asgovernments around the world attempt to pushtheir currencies lower to compete in globalexport markets. It’s been interesting to see a lotmore in the press in the last couple of weeksabout competitive currency devaluations and therising price of gold.

The term “currency war” has even slippedfrom official lips. But the IMF had a bigmeeting a few days ago, and accomplishednothing, so what’s new?Exactly. What’s interesting is that despite theincrease in talk about currency wars and the

rise in gold, one of the trends I have beenexpecting still hasn’t materialized. Gold in thelast couple of months has gone nowhere interms of euros, in terms of the Swiss franc, evenin terms of the S&P or the CRB index. It’s actu-ally lagging the euro at the moment, despite allthe problems in Europe.

Why is that, do you think? One of the issues is that fund flows seem toreally be dominating the markets. The extralevel of government involvement I think is cre-ating flows as people swing from being exces-sively short the euro to overcompensating andgoing long; chasing yield wherever they canfind it, rather than allowing the fundamentalsto fall into place. We saw that with the euro inJune. When there was much talk about the cur-rency going under and all sorts of dire circum-stances, the funds were incredibly short at 120.Now, they’re long at 140, and the press seemsmuch less focused on the euros’ demise. But it’snot all that much more off the boards than itwas in June. It is just that attention has beenshifted — and a similar thing could happen withthis issue of a currency war. If not now, I expectthat it will happen, as various countries strug-gle with how to deflate their currencies againsteach other in order to make themselves com-petitive. What this means is that there still is alot of opportunity in gold. In ’77 through ’80,when gold had its preeminent bull market, itwent up in terms of everything, the S&P, theeuro — well, the euro wasn’t around then, but itwent up in terms of the d-mark, the Swiss franc,and all major currencies, as well as most com-


modities. But right now, despite all the talkabout gold, it has under-performed the grainsand some of the other commodities. So I thinkthat there is still an opportunity in gold interms of other currencies. We’re not really inthe midst of a currency war — yet — when we’renot even seeing gold outperform the euro.

So we have that to look forward to? We have that to look forward to. The questionis how long that gets deferred. I do believe thatover a long period of time gold will do well.There is an issue in that there aren’t a lot ofgreat alternatives to the dollar or the euro orthe yen or the pound. So the fact that gold hasnot yet broken out against various currenciescould mean two things: It could mean, as I said,that we’re not quite at the dollar crisis thateveryone thinks we’re at, yet. But it could alsomean that there’s really a big opportunity in theprecious metals, especially when you pricethem in currencies other than dollars. Now, I’mnot a gold bug; I recognize that gold does haveits issues. It’s a very emotional metal and peopletrade it with emotion. Investment demand isoverwhelming any real demand at these prices.Nonetheless, I do think there’s a lot of room forincreased investment demand in gold.

Even though money has absolutely pouredinto the gold ETFs and such?Yes. One of the studies we have done [see chart,page 5] looked at the value of all of the com-modities ETFs and ETNs in the U.S. and com-pared that to the market caps of just a couple of

the large-cap stocks:Exxon Mobil (XOM),Apple (AAPL) andMicrosoft (MSFT). Asthe chart shows, in thescheme of global mar-kets, there’s signifi-cant growth potentialfor investment demandin commodities. Justwhen stacked againstthe market cap ofExxon Mobil alone,the open interest ingold is fairly small. Sothere is a lot of roomfor the gold market toexpand exponentially.But again, that doesnot mean that goldisn’t subject to very

emotional corrections. So as much as I thinkit’s always important to own some gold, it’s notenough. I also really want to own a basket ofcommodities that have actual utility — and goldis only worth what people think it’s worth atany given time. At a certain price, gold sort ofloses some of its utility as a commodity, becauseit becomes not as desirable in the jewelry mar-ket. It actually becomes more about investorsthan much else. By contrast, a basket of com-modities, each with unique supply/demand dri-vers and varying sensitivities to the economy,can provide additional diversification benefits.In other words, a coffee position can stand onits own supply/demand fundamentals, regard-less of whatever is driving the prices of copperor crude.

I suppose. But I have always found a cer-tain irresistible utility in gold — necklaces,for instance—But gold, at a certain price, sort of loses its util-ity, as it prices itself out of the jewelry market.Then it’s more about investor demand and itsrole as an alternative to paper currencies thananything else. That said, what our [page five]chart does show is that we are very early in see-ing investors move into gold. Gold, as a portionof people’s portfolios is still quite small. If youthink about how quickly the size of variousmarkets has exploded — and I’m not saying thisis necessarily going to happen to the gold mar-ket— but look at CDSs exploding. What did thatturn into? A $62 trillion market, very quickly.It was $900 billion in 2000 and $62 trillion in


2007. In other words, we’re a long way fromany true gold mania right now. So both goldand commodities with utility provide some pro-tection from a world in which none of the majorcurrencies is attractive.

So which do you like better here, gold orthe recently surging grains you startedthis interview enthusing about? There isno argument that grains are commoditieswith utility, as you say. I’m more focused on the Ag side here, becauseit makes a lot more sense to me. There really isa supply/demand picture which is playing out;the surge in grains is much less about fundsflow pushing prices up. Inflation-adjusted,agricultural prices are incredibly low, muchlower than other commodities. They have a lotof room to go up and I think the demand isthere. As you can see in our chart [opposite],both the nominal prices and the inflation-adjusted prices of corn, soybeans, wheat andsugar, are currently just fractions of their highs.Sugar is particularly extreme in that regard,because even in nominal terms, its high was 57cents — and that was not in 2008. It was in 1974— and now it trades around 25 cents. In infla-tion-adjusted terms, that sugar high was $2.43.

Which is more attractive here?Corn. Boxcar has been in and out of sugar twicesince the end of 2007, very profitably, but fornow, I like corn. Even though I recognize that,after two limit-up days in a row and all of thoseheadlines, we could be in a period when corn isoverbought. It has definitely had a huge move,and the Commitments of Traders report showsthat funds are very long; almost the longestthey have been this year. So I certainly wouldn’trule out a correction. There is definitely a lot oftalk floating around again about food inflation.

None of that bothers you?It doesn’t thrill me, but taking a broader per-spective about where things are headed, longterm — and about where fund interest is headedlong term — I really do think corn prices have alot of room to grow. The fact that the stocks-to-use ratio is so low and that the old crop/newcrop spread is so wide tends to show that thereis real true demand in the market, not merelyspeculative demand.

How do you figure?Because backwardation (when the prices ofnearby futures are more expensive than ones

farther out) more often than not shows peopleare willing to pay up to get the commodity now.So I think that you’re seeing in corn now is thatkind of very real demand. I also think, goingback to the chart comparing the money in com-modities ETFs to the market caps of those bigcaps, that the investment interest today in com-modities is still comparatively insignificant. Ifyou were to look at the net open interest of thespecs in corn, which is probably around 400,000contracts right now (approximately $11.3 bil-lion), in the scheme of things, that doesn’tamount to much money. We’re not even talk-ing about 5% of the market cap of Apple. Infact, we have been trying to put a dollar figureon the total value of all traded commoditiesfutures, globally. We think the number is some-where around a trillion dollars, but we have had


Corn — Cost Of Production


a lot of trouble verify-ing this; surprisingly,neither the CFTC northe Bank forInternationalSettlements seems tohave done the calcula-tions. But if you thinkabout that number andconsider that we’retalking about the trad-ing valuation of all thereal assets we need forsustaining life andeconomies, that’s real-ly not much. So I thinkAg commodities

prices, especially, can go a lot higher in thelong term. One other thing history teaches isthat commodities tend to have much larger

moves than one could ever imagine, before theyspike.

For example?When copper was at 50 cents, if you had comeout and said copper is going to be $4, theywould have thought you were nuts. And nowcopper moves in a day almost as much as it usedto in a week. In like vein, I can definitely see$10 corn and potentially see $15 corn, versustoday’s $5. But these are more long-term pro-jections. In the near-term, it does seem like alittle bit of the extra speculative interest, or fastmoney, might fall out of the market, whichcould lead to short-term correction.

That’s a lot of corn price inflation. And atsome point, as you said earlier, people getvery sensitive to food price increases.Substitution happens. You’re right. I’m not saying that we won’t seesome very serious volatility in these markets.To the extent that corn can be limit up for twodays; it can be limit down for two days. But thelonger-term trend is higher. This volatility inthe Ag markets isn’t as much an artifact offunds flows as it is a supply/demand story.Getting out of the office and doing fieldresearch is another very important part of com-modities analysis at Boxcar and I was prettyamazed, when I visited some farms in Indianaabout two months ago, at how much difficultythe farmers were having. Not only are theirequipment and supplies expensive, but thecrops just aren’t easy to grow. With corn pricesat these levels, they’re working on very slimmargins, when compared to those on industrialcommodities. They’re nothing like FreeportMcMoRan (FCX), which is doing darn well withcopper at these prices, makes. That trip wasincredibly helpful, actually. Some very interest-ing things came up that I was surprised theStreet didn’t pick up on until weeks later.

Like what?Like that the USDA’s yield estimates were waytoo rosy. The farmers didn’t hesitate to tell mewhen I went out there that they didn’t knowwhat the heck the USDA was thinking; that thecrop wouldn’t be close to what they were esti-mating. It wasn’t that the weather had beenhorrible, it was just a little bit hotter or a littlebit drier than normal. But when expectations inany market are priced to perfection, disappoint-ment is going to cost you. Anyway, going intothe field to talk to farmers or miners or distrib-

utors can be very helpful. If you are looking atscreens all day you can lose perspective aboutwhat you’re really dealing with. So while wedefinitely use technicals and look at spreadsand market history and fundamental statistics,I do really think that the most valuable funda-mental research comes from doing stuff on theground like I did in Indiana last summer.

Well, have you gleaned anything from mar-ket history that’s informing your bullishstand on corn here? One of the things I have been reading up onrecently is what they called “The Great GrainRobbery” in the ’70s.

That rings a bell — but only a dim one.That was when the Russians bought a lot ofgrain, very secretly, from Cargill and othergrain merchants and then all of a sudden —

The market discovered supplies wereshort and prices shot up.Yes, there were major shortages. That’s some-thing that you could see happen with China.They are trying to be so quiet about it, but I geta sense, just reading everything I can, thatthey’re kind of playing poker here. Thereappear to be some issues with their crop. Theyhave been a very marginal exporter of corn for acouple of years, but they basically consume asmuch as they can produce. It does look likethey’re very much at the tipping point of becom-ing a net importer. Currently, China importsonly about 2% of U.S. corn, so obviously anyhuge increase in demand from China couldstrain supply and push prices much higher.

Excuse me, but potential Chinese demandalways seems like it’s the first and lastresort of every bull in every market.Fair enough. You can argue that Chinesedemand has not yet played any real role in theU.S. corn market. But there are some signs, Ithink, that where we are with China in thegrains is where we were with them in the metalsin 2002. There are some strong signs thatChinese stocks are not what they say they are.

What sort of signs?One thing that is interesting is that corn tradedon the Dalian Exchange in China has been trad-ing at a very large premium to U.S. prices in thelast year. It’s been trading closer to $7.80 abushel.

Granted, Chinese“markets” aren’toften worthy of thatname, but why has-n’t such a large pre-mium been arbi-traged away? I have been lookinginto that. The pricehas really spiked up inthe past year. I think itis difficult to arbitragebecause of things likeshipping costs and theVAT — but that certain-ly doesn’t stop it in other markets. The otherfactor that’s important to look at is that theChinese claim their stocks are very high, withstocks-to-use ratios above 30%, which is severaltimes the U.S. ratio and more than double theworld ratio. If this is the case, why is corn in Chinatrading at a premium at all? Meanwhile, theChinese are very much posturing about howthey’re going to buy grain from us. The amountof grain they’re buying in the market currentlyis so minimal that it appears they are doing it totest ways to get into the market. The way thatthey talk about their grain stocks being so highis very reminiscent of copper and iron ore sev-eral years ago, when they claimed to have plen-ty as they tried to negotiate prices down. At thevery least, I will observe that when you look atthe metals market today, there’s an enormousChina factor priced in. But when you look atthe grains market, it has not been a dominantissue — though I expect it to be, long term.

Disappointing yields and China aren’t yourwhole bull case on corn, are they?Absolutely not. Grain export bans in Russia andthe Ukraine, starting last August, are exacer-bating a tight supply situation; at 15.8% for2010-2011, the global stocks-to-use ratio forcorn is at one of its lowest points since the1970s. And there are other real strains on thedemand side of the corn market that are verylong-term issues. The biggest is ethanol, whichnow consumes over one-third of annual corn pro-duction in the U.S. [see chart, opposite] — andethanol use is expected to continue to grow sub-stantially.

Over a third of the food crop is going intogas tanks? I’m sorry, that’s nuts. Especially when you consider that the U.S. pro-duces around 40% of the world’s corn. And when


you realize that com-modities prices tend tobe made on the marginand all of sudden youhave this fairly newentrant consuming 34%of the market. You reallyare going to have tohave darn good yields tomeet that demand. Onereason for the growth inethanol usage is theethanol subsidy, whichmay get cut, but doesn’t

look like it’s going away anytime soon.

Last I looked, corn ethanol was at best awash, in energy terms — it takes as muchenergy to make the stuff as it generates —Ethanol manufacturers and the corn lobby willclaim that it is getting better. But most thingsthat I have seen point to making ethanol fromsugarcane being around eight times more energyefficient than making it from corn, and say thatthe energy-corn ratio at best is about one-to-one.Which means that it takes about the sameamount of energy to make corn-based ethanol asit produces. It’s really a zero-sum game. Withthat said, the subsidy is there, currently 45 centsper gallon. There has been a proposal floatingaround the House Ways and Means Committee tocut it to 36 cents, as a way to generate revenue topay for some infrastructure projects, but elimi-nating it is a political non-starter; it’s a verystrong lobby in Washington. Even if the amountis changed, the subsidy is highly unlikely to goaway anytime soon. It is a big part of the cornmarket; potentially it is a big demand driver.With the blending margin (gasoline less ethanolplus the subsidy) recently almost at $1 a gallon,there’s plenty of incentive to make the stuff [seechart above].

Isn’t the EPA also looking to increase theamount of ethanol blended into gasoline?The Energy Independence and Security Act of2007 amended and increased the EPA’s renewablefuel standards (RFS) ethanol blend rate schedule,requiring 9 billion gallons of renewable fuel use in2008, stepping up to 36 billion gallons by 2022[See chart, below].

What? Making that much ethanol would useup more corn than American farmers pro-duce in a year —With today’s manufacturing methods, yes. Butthe modified RFS essentially caps corn-based(conventional) ethanol at 15 billion gallons by2015, while decreeing that the rest of those 36billion gallons come from so-called advanced bio-fuels, such as cellulosic and other non-corn-basedethanols. The latest data I have seen, based onApril consumption levels, puts current U.S.ethanol consumption at 12.8 billion gallons ayear. Meanwhile, the EPA just decided to increasethe percentage of ethanol that can be blendedinto a gallon of gas to 15% from 10%, at least forcars built in 2007 and later models. But reportshave surfaced about E-15 damaging some olderengines, so the EPA has put off a decision onexpanding the marketing of E-15 to them. Thereare indications that the market will be slow toembrace the higher blend, at least until a muchlarger segment of the fleet can use it. Retailersare not required to invest in the new tanks anddispensing equipment they’d need to sell it; athicket of state and local regulatory and markethurdles will slow its adoption. Nonetheless, thelong-term trend points to higher corn demandfrom ethanol producers.

These record corn prices aren’t high enough,you said, to discourage the ethanol manu-facturers?They will crimp margins a little but at $5 cornwe’re not yet at a price where it would be politi-cally feasible to pull the ethanol subsidy or tochange the renewable fuel standards. All you haveto do is look at the sugar price supports, if youwant to understand why I’m very skeptical of anynear-term ethanol repeal, no matter how crazythe economics. The sugar subsidy makesabsolutely no sense and sucks up quite a lot ofmoney, but we can’t get it repealed. And it bene-fits very few producers whereas the ethanol sub-sidy does benefit a lot of farmers. When you lookat how agricultural subsidies have worked overtime in the U.S., it’s very disconcerting. Anyway,even leaving aside politics, I think we’re going to


see a lot of volatility in the grain markets. Whathappened with wheat early last summer was aharbinger of things to come.

How so?When Russia announced its export ban, wheathad a couple of limit-up days. Then a limit-downday and then a decent drop in price. It appearsthat there’s a much higher floor in wheat rightnow than there was before the export bans. Ithink that higher floor is here to stay. But so isvolatility, I expect. Especially considering thataccording to last week’s COT report, the fundsare the longest they have been all year in corn andsoybeans. I could see a rush to the exits on specu-lation around the current report, to take profits,but I still think prices will trend higher. Cornactually went into pretty extreme backwardationa couple of weeks ago, and the latest crop reportonly enhanced that. The Dec. of 2011 [Decemberfutures contract] and Dec. of 2012 are trading atvery large discounts to Dec. of 2010. Clearly, themain story there is the yield surprise in the USDAreport, but I think the long-term issues aroundethanol demand and yields being generally pricedfor perfection will continue in 2011. What’smore, the China story could be a much biggerissue in 2011, if they really are at a tipping pointof becoming an importer.

I’m getting the picture that you’re bullish oncorn even at these levels —Yes. As I said, corn is still trading at only a frac-tion of its inflation-adjusted all-time high. Westarted buying corn in Back 40 in January, 2009,when corn was $3.87 a bushel — and when specu-lative net interest, as reported in the CFTC’sCOT report, was at the lowest level since 2006.But in the grains, where it is very difficult to havepassive investments — something, unfortunately,most buyers of commodities-based ETFs appar-ently don’t understand — I do use options onfutures quite a bit. While corn is currently back-wardation, that hasn’t always been the case overthis stretch, and it can be quite expensive to buy acontract and to roll it or to buy the contract a yearout.

When the market is in contango that’s arecipe for throwing away money.Exactly. You basically have a negative roll. It is asif you are starting out your year down. In a lot ofthe commodities, the contango has been so steepthat it has been like starting out the year downanywhere from 8% to 14%. So you really have tobelieve that commodities are going up a lot every

year to hold a passive investment under those cir-cumstances. That’s why I use options strategiesalong with my fundamental, technical and histor-ical research to invest in these markets. That’swhat has allowed me to stay with this corn tradefor such a long time. I have been able to buy cornand stick with it a little longer because I was sell-ing calls against the position until I felt likeeverything fundamentally and technically waslined up correctly for me to take a bigger position— and one not entirely capped with options. Sonow, when I feel that things are getting a little bitfrothy, I tend to try to sell some options againstpart of my position to get a little bit of income.My hope is that, if there is a correction, I have theopportunity to buy more in front of what I thinkis going to be a long-term trend. I also havemoved a lot of my Dec. of 2010 corn into Dec. of2011 to take advantage of the backwardation —and expecting that the fundamentals will be evenmore bullish next year. The Dec. of 2011 are real-ly the best of both worlds: A positive roll and evenmore bullish fundamentals.

What about wheat?I’m much more excited about the other agricul-tural commodities. I do think wheat is going to gohigher, but I’m not all that excited about it,because it’s likely that the price will be drivenmore by the corn markets than by the wheat mar-ket. That said we have seen that droughts canobviously lead to problems with wheat. In fact,water is such a big issue for wheat, and the othergrains, that I make the case that grain futures canbe used as a vehicle for investing in the world’sincreasingly scarce water resources.

In what way?Basically, to the extent that we see countriesdoing what Saudi Arabia did in 2009, when itabandoned a 30-year program to grow wheat (inwhich it had achieved self-sufficiency but deplet-ed scarce water supplies) and returned to import-ing wheat, it is very bullish for wheat prices. Itmakes it evident that by importing wheat, nationsare importing water. The Saudis calculated thatthey could save1,300 to 1,500 cubic meters ofwater for every ton of wheat they importedinstead of producing. A lot of other countries arelooking at that. China understands it. Grainfutures may be the best instrument for investingin water. After all, it’s difficult to find pure-playinvestments in water; they tend to be either toospecialized (utilities, water treatment companies,water rights companies, infrastructure projects),or too broad, like Coke and Nestle, where water isonly a small part of a huge conglomerate. Andwater shortages are likely to have dramaticupward impact on grain prices.


That sure sounds likea bull case.Well, droughts inAustralia from 2003-2008 led to dramaticrice and wheat short-ages worldwide. Thedrought’s severity in ’08led to significant spikesin global grain pricesand sparked the foodpanic I mentioned earli-er that even affectedCostco — before it wascut short by the creditcrisis. But the move inwheat in 2008 was soextreme and so parabol-ic that it really hurt the

market in ways that are still playing out. You didget substitution in feed grain and you did get a lotof countries expanding their wheat growingacreage and things like that, which are still mak-ing wheat a little less exciting than corn here. Notthat I think it won’t trade significantly higher.One thing that has been very interesting aboutwheat this year is that, until this summer, thespecs were actually net short wheat — they hadmaintained that short position for almost a yearafter the big spike up. So I get the sense thatwheat is not a commodity that has made moneyfor a lot of speculators this year, despite the moveup. Even now, they are only something like22,000 contracts net long; nothing like in corn.Anyway, while wheat is going to be more or lessjust following in corn’s footsteps, there is no rea-son that we can’t see prices at least double fromhere. The problem with the wheat market herefrom an investor perspective is that it is in a pret-

ty deep contango. December ’11 wheat is around7.50 and December ’10 is around 7.12, which is apretty significant hurdle to get over. Longerterm, of course, from an emerging markets per-spective, there’s definitely a case to be made forall of the grains, as increasing prosperity allowsmore and more people to move up the food chain.It’s a simple fact that the amount of grain neededto sustain a diet based on the consumption of beefand chicken is much higher than what’s usedwhen people subsist on rice for the most part [Seechart nearby]. It’s not that commodities areimmune to corrections, substitution does hap-pen, as we saw in 2008 when prices spike toohigh. But I do think that floor prices are beingpretty continually set higher.

Another harbinger of inflation to come?I think so. 2008 was kind of amazing when youthink back. Just a small slice, I suspect, of thingsto come. And the problem with food inflation isthat it does feed on itself. It does lead to hoardingand it does lead to countries doing things thatcause more problems, even when there is plentyof food around. In those cases, there then can besharp corrections. Though I will admit that thesharp correction in ’08 was caused more by thecredit crisis than the fundamentals, and it wasexacerbated in the grains by the ethanol manu-facturers. They had decided during the run-upthat they could make more money hoarding cornand selling futures than by making ethanol, andwhen the crisis hit, they ended up having todump corn stocks on the market, worsening thedecline. But generally, once the notion of foodinflation takes hold in people’s minds, they startrioting in places and then countries shut off

exports and it really canfeed on itself.

Turning back to com-modities investments,you clearly believe inactive management —even if that is “talkingyour book” sincethat’s what Boxcaroffers.Absolutely, no doubt.Commodities ETFs ingeneral are simply a poorreplacement for activemanagement, with veryfew exceptions. The goldETF, the GLD, is fairlysolid, because it actuallyowns the physical gold.But many of the ETFs,


especially in the agricultural and energy sectors,have a lot of issues. One, they tend to havetremendous tracking error against their bench-marks, for example, in the case of the U.S. Oil Fund(USO), its prospectus states that they target atracking error of plus/minus 10. Two, they havethis issue of dealing with contango — and most ofthe commodities markets currently are in contan-go — which leads to a large negative roll yield asfutures are rolled passively, without regard to rollcosts, which can dramatically reduce returnsfrom price appreciation as the ETF continuously“buys high” and “sells low.” [See chart below,opposite]. So a person who invested, for exam-ple, in the crude ETF at the price lows of ’08 isprobably only up about 10%.

Ouch, $30 to $80 and they have only cap-tured 10% — what a deal. And it’s onlyrecently that those ETFs have been “outed”in the press. Right. It’s a fairly confusing issue. But if you addcontango and tracking error together, it can bevery dangerous. For the most part, the ETFs,with the exception of GLD are not serving thepurposes most investors think they are — which Ithink will continue to be very problematic. And Ihave read recently that one of the large aluminumcompanies is talking about launching an alu-minum ETF— as a way of unloading its invento-ries on investors!

That speaks volumes.Yes. Talk about storage costs. The idea that thereare companies saying, “We have got too muchaluminum, why don’t we go start an ETF andthen it will just be warehoused to investordemand,” is mind-boggling. I almost fell off of mychair. Couldn’t believe what I was reading. Thenthe other issue with ETFs is that they are stuck,by design, with having to roll at certain times —which are publicly disclosed. So a lot of peopleknow when they’re rolling and try to push againstthem in the market.

Right, they might as well have big targetspainted on their backs.Some have tried to get a little cagier, but they’restill stuck with very passive management, rollingwithout real regard to fundamentals or to back-wardation or to what’s going on in these markets.Even though, at the moment, commodities maystill seem pretty correlated as an asset class, histo-ry certainly says that’s not usually the case, andthere are signs here and there that they arereturning to more normal trading patterns based

on supply/demand.

There are?It seems like it to me, with the exception of themetals. I mean, you can argue that crude hasbeen reacting to an oversupply and that thegrains have finally been reacting to expectationsbeing out of whack, the crops not being great,low stocks and increased demand. The reality isthat different commodities do have their ownunique characteristics— and that makes them dif-ferent than other asset classes. So it is going to beimportant to start differentiating between themas the market stops being all about risk on/riskoff trades and more about supply and demand. Istill believe it’s good to have portfolio exposure toa diverse group of commodities with the correctsupply and demand dynamics and limited nega-tive roll yield. But you really require active man-agement for that.

Isn’t it still true though, that floods of pas-sive money, not just from ETFs but fromvarious institutional investment vehicles,can overwhelm the fundamentals from timeto time? Commodities markets just aren’tthat big, as you pointed out. Yes. That’s a very tough thing. It is something Ithink I will be able to take advantage of, on theone hand, but I know a lot of experienced com-modities investors who are very frustrated withall the passive money that has come into the mar-kets, because it so often defies logic. The passivemoney, by definition, isn’t doing any fundamen-tal analysis and that can really skew things. Ingeneral, investment demand has become a funda-mental of its own in many of the commoditiesmarkets. Definitely in the precious metals mar-kets. I do think that investment demand is, forthe most part, here to stay. Although, as we sawin 2008, how that plays out when there’s a liquid-ity crisis is an issue. But it creates opportunities,when the passive money comes flying out, forthose who can differentiate what is overpricedfrom what is a good value.

No doubt that can be a bonanza for savvyspeculators. But it also has real world con-sequences for producers and consumers ofcommodities — meaning all of us. Exactly. Though it can work in both directions.One example of fund flows having a very largeimpact on commodities prices was visible earlierthis year in the world sugar market. The sugarmarket has been in deficit, meaning demand hasbeen in excess of supply. What happened was that


the world price had fallen during 2006 and 2007,dropping below 10 cents a pound — which waswell below India’s cost of production. The upshotwas that India, the world’s second-largest sugarexporter, cut production dramatically in 2008-2009 and became a net importer, which causedhuge strains on the markets. So the funds gotextremely long last year — and the sugar pricespiked up to 30 cents around the beginning ofthis year. But then it very quickly—in a matter ofweeks—collapsed to 13.

What happened?When I spoke to people in the sugar business,they attributed a lot of the selloff to the fundsimmediately fleeing for the exits when price ofsugar failed to break through the 30-cent level.That was also right about the time that lots ofinvestors were very worried about Europe. It wasclear to me, though, that a flight to the exits thatpushed the price down by 50% in a matter ofweeks – and to below the cost of production in acommodity in a deficit — probably wasn’t warrant-ed. I spoke to farmers and a lot of the sugar com-panies and they all confirmed that those pricelows were below the cost of production, even forthe lowest-cost producers. That provided mewith an opportunity to buy sugar at a great pricein April (15.19 cents a pound) — after a large cor-rection and when nothing had really fundamen-tally changed in the market. There was still adeficit and there was still a lot of demand world-wide.

Do you still like sugar?Well, at these prices, it’s a little bit less interest-ing. It’s pretty much done a roundtrip [see chart,nearby]. March sugar is around 26 cents. It hasbeen a very wild ride. Interestingly, though, this

is another of the few markets that is still in back-wardation. So this is a case where I had boughtfront-month sugar back in April, but when it hitmy price target, which was around 19.5 cents, Imoved out into the later years.

I’m guessing you have employed optionsstrategies in sugar, too.I did. At the time sugar was 15, I actually was ableto sell some puts just to give myself a little bit ofbuffer in case the price went down a little furtherin the volatile market. I knew there really was afloor; there simply wouldn’t be more produced, ifit got below a certain price, but as I said, thevolatility was wild. The option strategy cappedout my upside around the 19 area on the portionof my position that I sold calls against. Becausethe volatility was so incredibly high, I was able tosell both a put and a call and cover sugar goinganywhere from around 13 cents to around 18. Sothe options strategy really gave me a lot of roomto breathe on the position. Whenever I am sellingor buying options, what I look for is an appropri-ate risk/reward. I look at any option strategy as adirectional strategy, in the sense that if I’m sell-ing a put, I view it as owning the future. From arisk management standpoint, I look at thenotional underlying exposure. I really like tomake sure, in options, that I have a very goodbuffer on either side. There are also times —when I think options are inexpensive and I thinkthere could be a dramatic move — that I will actu-ally buy options positions, instead of just usingthem as hedging tools. That is something I didlast May, buying puts on crude when volatilitywas low and the options were relatively inexpen-sive.

Nice timing. Why did you turn bearish?Just because I was very nervous about the highinventory levels and concerned about the globaleconomy. Plus, there was a very large speculativeinterest in crude at that juncture. So I figuredthat crude would be a likely target, if the fundsdecided to run for the exits. But generally speak-ing, I use the options for positioning. When Ilook at buying a commodity, I look at it fromevery angle along the options to futures spec-trum, before deciding how to proceed. Whileemploying options has costs and adds a layer ofcomplexity, I don’t feel it has capped my gains inmarkets where we have had very large moves, andit is a way to manage risks, to deal with some ofthe issues surrounding contango in commoditiesmarkets — and to avoid the capital drain that isoften associated with passive commodities strate-


gies.

Let’s talk about that other commodity mak-ing headlines with rising prices: Cotton. It has been extremely volatile and is one of theareas where speculation certainly has become anissue [see chart, at right]. Along with wheat, itwas one of the real problem areas in ’08. Whenthe cotton market collapsed from $1 to some-where in the 35 cents a pound range in less than ayear, it put a lot of cotton companies that hadbeen around for generations out of business. Twoof the biggest old-line middlemen cotton compa-nies merged and one went bankrupt. Morerecently, the number of limit-move days — in bothdirections — has been fairly excessive for the lastcouple of weeks—and this week has definitelybeen wild.

Should I take it, then, that you’re notinvested in cotton?Not anymore. Back 40 bought cotton back inNovember of ’08, after it had declined to 43 centsa pound. I had met with U.S. farmers and realizedthat, amid the financial crisis and upheaval in theindustry, the cotton crop was likely to shrink.Cotton is difficult to grow, requiring long leadtimes and lots of water and labor, so farmers hadlots of incentives, on top of the low price, torotate to other crops. We started selling some ofour position in May of 2009, when cotton hit 59cents a pound. Then, last April, when the currentcrop month started trading at a large premium tothe new crop months, producing a very backwar-dated market, we started selling some of Back40’s position in front-month cotton at 82 centsand buying new crop cotton at 77 cents. But weexited the remainder of the position this week, ataround $1.

The WSJ headline about cotton breaking aCivil War record was too much for you?It wasn’t that, though that was quite an article. Itappears that there is better value in grains such ascorn, and the price action — with continuallyexpanding limits both up and down — was remi-niscent of March of 2008, not a sign of a healthymarket or a good risk/reward at these levels.When I do decide to reestablish the position, Iwill look at cotton further down the curve, as thebackwardation is very extreme. For example,despite the record print in front-month cotton soprominently displayed on the cover of theJournal, the Dec. of 2011 is trading at 86 cents!Besides, from what we can see, there is still a lotof passive investment money in cotton — and all

across the commodities space, really. It doesn’tseem that there were many lessons learned in2008. The CFTC has made some efforts to shed alittle bit more light on the funds and the swapsdealers. They are providing disaggregated data onthe positions in the agriculture markets to showwhat really is activity by managed money andwhat activity is the swaps dealers — who, it wassuspected in ’08, actually controlled the majorityof the commodities markets. So there is, at least,some movement towards transparency. But as acommodities investor, I do think the heavyinvolvement of the passive institutional funds canbe an issue at times. One thing that the CFTCcould do would be to raise margin requirements.There doesn’t seem to be any real reason why aninvestor — even one like me — should only have toput up between 2% and 5% to control a contract.

That’s a whole lot of leverage. And com-modities are about the only place you canfind that today. Very true. That’s why, from a risk managementperspective, what’s important to me isn’t howmuch margin I put down, it’s my notional down-side exposure. Looking at it that way helps meminimize the risk of the leverage, because I reallyunderstand what I own. You can still be aninvestor and use leverage without having to takeit to 20 times or higher.

Too bad guys weren’t thinking that way inthe CDS and CDO markets in the run-up tothe financial crisis. Yes, that was an issue. There is a lot of room forabuse in these markets. But that said, the com-modities markets are very exciting here. Givenour unprecedented monetary and fiscal policies,as I said, there is enormous potential for inflationof just unprecedented magnitude. Any way youlook at it, hard assets and especially commodi-

Reprinted with permission ofOCTOBER 18, 2010 PAGE 15

ties that have utility are likely to be the benefi-ciaries of all of the money that has beenpumped into the system. They can keep print-ing more money and issuing more debt, but youcan’t create more of these various commodi-ties, at least not until their prices go muchhigher.

On the other hand, commodities don’tthrow off a stream of earnings or dividendincome. A commodity is only worth whatyou can get the next guy to buy it for. True. Though those are some of the reasons Iuse options strategies — to garner income oncommodities positions.

You said when we started that you like Ag

better, but you still sound attracted to themetals. Yes, though on the base metals, I’m a little bitmore cautious just because it is a very muchChina story. And it is very difficult to get thecorrect numbers out of China.

No, really?As you observed, I’m prone to understatement.

Did you see the piece in today’s FinancialTimes, about China making a killing on awell-timed purchase of copper?Yes, some $1.5 billion, because they boughtcopper around $1.90 when it crashed. China isthe best hedge fund there is. They clearly recog-nize the one very important fundamental that’soften overlooked in the commodities markets:price.

Price is a fundamental?Price truly is a fundamental because you canlook at the supply/demand equation all youwant, but at a certain higher price, new supplydoes show up out of nowhere. It’s sort of amaz-ing how that happens, but it does. And likewise,at a certain higher price, demand will be hurtby substitution. And the same dynamic workson the flip side. A certain low price will shutdown marginal supply. For instance, one areawhere I have a long-term bullish view is naturalgas, because I think these low prices couldreally generate demand. There’s definitely alarge supply overhang, between the shale findsin the U.S. and LNG imports. But we have nowhad nat gas in the $3 to $4.50 range for a cou-ple of years, which I see generating long-termdemand. Conversions from coal and vehicleusage, those sorts of things.

So am I right that you also like gold betterthan things like platinum? Yes, basically because those metals have hadsuch big runs and gold can maintain higherprices even when it loses luster in the jewelrymarket, because it can function more as a cur-rency than a commodity. Despite all of the talkyou have heard about gold, it under-performeda lot of the other commodities last year: leadand copper, and also platinum and palladium.Granted, there have just been platinum and pal-ladium ETFs created, which could have veryunforeseen long-term consequences, but fornow that’s pushing their prices much higher.

Unforeseen consequences?


Silver ETF Holdings And Prices

Note: DB Chart as of 10/8/10

I was actually very surprised when the platinumand palladium ETFs were allowed to launchbecause those markets tend to be very, verylimited in terms of supply. Much more limitedthan silver, and a lot of companies involved insilver purchasing lobbied fairly hard for theCFTC not to approve the silver ETF. Theyvoiced concerns that it would make it more dif-ficult for companies actually using silver toobtain supplies. That’s one risk we’re runningwith many of these ETFs — the possibility ofpassive investor demand overwhelming thephysical market. There could be issues withdelivery against them if it gets to the pointwhere there are more ETF shares than there isthe commodity to go around. It could lead tosome real squeezes. Anyway, what I was goingto say is that even though gold looks attractivecompared to the platinum group metals, themetal that holds the most long-term attractionfor me here actually is silver.

Why silver?Like gold, it is a store of value, but it also haslots of utility. It’s the best conductor of electric-ity and heat of all metals, in addition to beingvery strong, corrosion resistant and even hav-ing anti-bacterial properties. Another thing insilver’s favor as a commodity investment is thatmost of the substitution that could take place inindustry to reduce demand for it has alreadyhappened. (Think about photography going

digital.) Interestingly,there was very littledrop in demand in theETF during the 2008crisis. The ratio of goldto silver is currentlyaround 57.Historically, the ratiohas traded much lower.The price of gold oneday last week moved bya $25 nominal amount— greater than the totalnominal price of anounce of silver. Long-term, the ratio shouldmove to half of where itis today. What’s more,there’s even a Chinastory attached to silver.

Of course. Do tell. In 2008, China moved

from being a net exporter of silver to a netimporter, most likely as a result of a combina-tion of rising industrial consumption and theemergence of retail investment demand. [Seechart, above]. In fact, Deutsche Bank has fore-cast that China’s silver imports will set recordsthis year. So I really think that silver could be avery, very exciting metal long-term. It is a fairlyilliquid market — some things about it haven’tchanged much since the Hunt Brothers’ days — soinvestment demand in silver could overwhelmthe market. That said, over the near-term, Ithink both silver and gold are vulnerable to cor-rections caused by a potential reversal in thedollar — which, as we have seen, can be quitesharp. But they should trade much higheragainst the major paper currencies over thenext several years.

Thanks, Melanie.

Source: CEIC, Deutsche Bank

China Silver Trade

W@W Interviewee Research Disclosure: Melanie Bialis is the CEO and Founder of Boxcar Capital Management, LLC, which currently manages two commodities-focused funds, Boxcar CapitalPartners, LP and Back 40 Capital, LP. This interview was initiated by Welling@Weeden and contains the current opinions of the interviewee but not necessarily those of Boxcar Capital, LP.Such opinions are subject to change without notice. This interview and all information and opinions discussed herein is being distributed for informational purposes only and should not beconsidered as investment advice or as a recommendation of any particular security, strategy or investment product. An offer to purchase interests in Back40 Capital or Boxcar Capital canonly be made pursuant to Private Placement Memorandums, which contain important information concerning risk factors, performance and other material aspects of the funds, and must becarefully read before any decision to invest is made. This interview does not contain complete descriptions of the funds and the risks associated with investing therein, and is subject to andqualified in its entirety by reference to the PPMs. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. In addition, forecasts, esti-mates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, or as an offer or solicitation for the purchase orsale of any financial instrument. No part of this interview may be reproduced in any form, or referred to in any other publication, without express written permission of [email protected] performance is no guarantee of future results. For further information call Boxcar Capital (310) 899-2064.

Weeden & Co. LP’s

Research DisclosuresIn keeping with Weeden & Co. LP’sreputation for absolute integrity in itsdealings with its institutional clients,w@w believes that its own reputationfor independence and integrity areessential to its mission. Our readersmust be able to assume that we haveno hidden agendas; that our facts arethoroughly researched and fairly pre-sented and that when published ouranalyses reflect our best judgments,not vested pocketbook interests ofour sources, colleagues or ourselves;w@w’s mission is strictly research.

This material is based on data fromsources we consider to be accurateand reliable, but it is not guaranteedas to accuracy and does not purportto be complete. Opinions and projec-tions found in this report reflecteither our opinion (or that of thenamed analyst interviewed) as of thereport date and are subject to changewithout notice. When an unaffiliatedinterviewee’s opinions and projec-tions are reported, Weeden & Co. isrelying on the accuracy and com-pleteness of that individual/firm’sown research disclosures andassumes no liability for same, beyondreprinting them in an adjacent box.This report is neither intended norshould it be construed as an offer tosell or solicitation or basis for anycontract, for the purchase of anysecurity or financial product. Nor hasany determination been made thatany particular security is suitable forany client. Nothing contained hereinis intended to be, nor should it beconsidered, investment advice. Thisreport does not provide sufficientinformation upon which to base aninvestment decision. You are advisedto consult with your broker or otherfinancial advisors or professionals asappropriate to verify pricing andother information. Weeden & Co. LP ,its affiliates, directors, officers andassociates do not assume any liabili-ty for losses that may result from thereliance by any person upon any suchinformation or opinions. Past perfor-mance of securities or any financialinstruments is not indicative of futureperformance. From time to time, thisfirm, its affiliates, and/or its individ-ual officers and/or members of theirfamilies may have a position in thesubject securities which may be con-sistent with or contrary to the rec-ommendations contained herein; andmay make purchases and/or sales ofthose securities in the open marketor otherwise. Weeden & Co. LP makesa market in Apple (AAPL) andMicrosoft (MSFT). Weeden & Co. LP isa member of FINRA, Nasdaq, andSIPC.


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