The financial units of Archer Daniels Midland Co., Continental Grain Co. and Cargill Inc., among the biggest names in agriculture, are pushing into the money management business as commodities markets are soaring.
ADM Investor Services Inc., a futures broker owned by ADM, is starting a fund that will invest client money with independent commodities trading advisors, according to a regulatory filing last month. Arlon Group LLC, Continental’s investment management arm started in 2008, is accepting money for funds that make commodity, stock and private-equity investments tied to agriculture.
“It’s just another way to leverage our knowledge in a slightly different business model,” said Matthew Keegan, a portfolio manager at New York-based Arlon. “You start to collect fees and revenues based on managing assets rather than by crushing soybeans or transporting grains.”
The food producers have traded in financial markets for decades to hedge against price swings and lift returns on excess cash. With prices for some agricultural products near record levels, their financial units are seeking more sources of income by marketing their expertise to third-party investors. Black River, a unit of Cargill that opened to outside money in 2004, now oversees $4.5 billion on behalf of external clients, said Michael Grover, head of investor relations.
Investors are turning to commodities as a hedge against inflation as the U.S. struggles to rein in its budget deficit, and because they’re liquid and don’t move in lockstep with stocks and bonds. Cotton and cattle futures reached record highs this year, and hogs, coffee, cocoa and sugar reached multiyear highs. Corn is nearing a record.
The S&P GSCI Agriculture Index has gained more than two- thirds in the past year and rose to a record in March. Global food prices, as measured by a United Nations index of 55 food commodities, reached a record in February.
The gains have fueled the growth of managed futures, an investment strategy offered by commodity trading advisers, also known as CTAs, that gives investors access to a range of markets, including currencies, energy, metals, interest rates, stock indexes and traditional agricultural commodities. Managed futures funds took in net deposits of $39.1 billion in the year ended March 31, the most of any hedge-fund strategy, according to TrimTabs Investment Research Inc. and BarclayHedge.
“We have changed from a price-discovery market to an investment class,” said Glenn Hollander, a partner at Hollander & Feuerhaken, a Chicago-based firm that trades in the cash markets for grains.
Cargill, a Wayzata, Minnesota-based food producer and marketer ranked by Forbes Magazine as the largest closely held company in the U.S., was the first of the three agricultural companies to begin managing outside money through its investment affiliates. Those units include Black River, which manages hedge and private-equity funds, and CarVal Investors, created during the savings and loan crisis of the late 1980s as a specialist in distressed debt.
Black River was established in 2003 as the successor to Cargill’s proprietary financial trading operations, which had a 20-year history of trading in global financial markets, according to the investment advisory company’s Web site. Headed by Gary Jarrett, the firm started raising money last year for separate private-equity funds that specialize in food and agriculture, according to regulatory filings. The Black River Commodity Trading Fund, established in 2009, now has about $535 million in assets.
ADM, the world’s largest grain processor with $61.7 billion in revenue for the year ended June 30, uses futures to manage risk posed by fluctuations in agricultural commodity prices as well as transportation costs, energy prices, interest rates and foreign currency exchange rates, according to the Decatur, Illinois, company’s annual report.
The company’s dominance in cash markets for corn and wheat suggests it also plays a big role in the futures markets for these crops, said John Person, president of NationalFutures.com, a Glenview, Illinois, investment adviser.
“ADM is a major player as far as commercial markets and bringing liquidity as a hedger to the commodity arena,” Person said. “You can bet your bottom dollar they are hedging in the corn futures business.”
ADM Investor Services provides commodities trading and hedging services to ADM. The Chicago-based firm also offers consulting services to clients interested in managed futures strategies through Balarie Capital Management, a division of its Archer Financial Services subsidiary.
ADM Investor Services filed a private placement notice with the U.S. Securities and Exchange Commission on April 15 for a diversified strategies fund that will allocate money to independent advisers who trade futures on interest rates, agricultural and energy commodities, and foreign currencies. It’s the first time that the firm has managed outside capital, according to Thomas Kadlec, president of ADM Investor Services.
“Over the past several years, we have seen a growing interest in managed futures as a liquid trading strategy that is non-correlated with traditional investments such as stocks and bonds,” Kadlec wrote in an e-mail. The fund will provide investors with a “diversified exposure to a basket of commodity trading advisers.”
Roman Blahoski, a spokesman for ADM, said in an e-mail that ADM Investor Services, while a wholly owned subsidiary, operates independently of the parent company. ADM uses ADM Investor Services for clearing services, but does not disclose details related to these transactions, Blahoski said.
Emanuel Balarie, the managing director of Balarie Capital Management, will oversee the fund with Jack Schwager, the author of books such as ‘Market Wizards’ and ‘Managed Trading: Myths & Truths,’ as well as senior managers at ADM Investor Services.
Continental Grain, established as a grain-trading firm in Arlon, Belgium, in 1813, became one of the largest privately held companies in the world, with operations in barges and livestock as well as grains. The company has been divesting some agricultural businesses, including its worldwide grain operations, which it sold to Cargill in 1999, and redeploying the capital through Arlon.
Arlon is taking in outside capital for a stock and commodities fund that focuses on the food and agriculture industries, and for a commodities-only fund that started earlier this year, according to co-managers Keegan and Ari Gendason. The firm also plans to obtain more outside funds for Arlon Food & Agriculture Partners LP, a $300 million private-equity fund formed in December 2009 and backed by Rabobank Groep of the Netherlands, the world’s largest agricultural lender, Keegan and Gendason said.
The firm established its stock and commodities fund, Arlon Opportunities Investors LP, in 2008 and has run it primarily with capital from Continental Grain up until now, Keegan and Gendason said. Part of the fund’s strategy is to take advantage of opportunities in the commodities market created by rising investor interest as well as supply and demand dislocations, Gendason said in an interview last week.
“Historically the agricultural complex has taken a back seat in the commodities world to energy and metals,” Gendason said, adding that the situation has now changed. “The corn market has gotten a lot more attention in the prior nine months than it has in the last 25 years.”
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