Why Jim Rogers Still Favors Commodities

Jim Rogers, noted investor and founder of the highly successful yet now defunct Quantum Fund (with George Soros) recently conducted an interview with Newsweek and we wanted to highlight the interesting bits. For the most part, Rogers has been saying the same thing on mainstream media appearances over the past few months. He appears on TV so often that he keeps having to repeat himself. But, at least he's not like Jim Cramer and doesn't throw out a million ideas just for the sake of new content.

So, while Rogers might not always have new points, it's interesting to hear him elaborate in more detail on some of the investment themes he has divulged thus far. We've covered many of his major stances on the blog before, most notably publishing a summary of Rogers' recent portfolio. Some of his main bullish theses include agriculture and commodities. Focusing in particular on agriculture, Rogers has become so bullish that he has gone to the extreme of investing in physical farmland. He touches on some of these theses again in his interview, where he talks about commodities:

"What’s the fundamental case for commodities right now?
Supply is declining. There’s been 35 years of low investment in production capacity. The last lead smelter in the U.S. was built in 1969! There’s been no major oilfield discovery in 40 years. Oil is in decline. According to the International Energy Agency, oil reserves are declining significantly. At this rate, in 20 years, there will be no oil left. The only people to make money in the next 20 years will make it in commodities. It’s the only asset class where the fundamentals are improving. I mean, look at Citigroup, look at GM. Those fundamentals are not improving.

Do you see commodities as an inflation hedge?
Absolutely. This is only time in history where you’ve got every central bank in the world printing money at the same time. Consumer prices are going to go way up. The public is already getting out of paper money, which is why you’re seeing gold go up.

Does the future growth of China factor into your bullishness?
China is tiny in comparison to the U.S. economy. Anyone who thinks that the commodities story is driven by China needs to do more homework. In the 1970s, everyone was in recession, and you still had declining supply [in oil] and higher prices. Asia wasn’t even in the game then. China was run by Mao. But now, of course, there are those 3 billion people in Asia who are in the game. It’s just another factor.

Are we going to see another food-price spike sometime soon?
Definitely. I think you should move back to Indiana and marry a farmer. There are times in history when the money lenders have been in charge, and we just came through one of those periods. But it wasn’t always that way. Wall Street was a backwater in the ’40s, ’50s, ’60s and ’70s, and it will be again. Farmers are going to be the ones driving Lamborghinis, and the traders are going to have to learn to drive tractors.

How about you? Are you upping your own commodities positions right now?
As a matter of fact, I am. I never sold anything to begin with. And I’m not planning to, either."

You can read about the rest of Rogers' current investment themes in detail in our recent summary. And, as always, you can check out the interview in its entirety at Newsweek.

Comments

[Stone Fox C...:]

Petrobras has had major oil discoveries and China is a huge mover of some commodities like Copper and Steel. Guess Jim was talking oil and natural gas. His points are very profound though but very long term focused. Think we'll have a period where the financials will rebound from these horrific lows b/c of cheap money from the govt, but then they'll go into a period where profits will be flat for years as the cheap money is removed. Commodities and infrastructure on the other hand will continue their ways from mid 2008. The increased investment from the last couple of years is being swindled away with reductions this year.

Apr 15 06:38 PM

[OilFinder:]

Jim Rogers is a fool. If he thinks there haven't been - and won't be - any major new oil discoveries I'd suggest he start paying attention to the news.

How does 100 billion barrels of recoverable oil in the Santos basin offshore Brazil sound?
www.ft.com/cms/s/0/d98...
And that is *just* in the Santos basin. The entire coast of Brazil is lined with hydrocarbon-rich basins, the majority of which have only lightly been explored. The governor of one northern Brazilian state believes his coast has similar deposits to one of Brazil's other big oil-producing basins, and he is probably right:
www.bloomberg.com/apps...
Why is he probably right? Because his state used to be attached to the west coast of Africa - particularly Ghana - where they're just starting to make large discoveries:
blogs.wsj.com/environm.../
www.thestatesmanonline...
For those who don't understand, South America and Africa were once attached but separated starting in the Jurassic. This was when the sediments eventually forming the oil began to deposit. If there is an area off the western coast of Africa with large oil deposits, there is a very high probability of a "twin" along the South American coast. And vice-versa. For example, the presence of large sub-salt reserves off the southeastern coast of Brazil almost certainly means similar deposits off the coasts of Namibia and Angola;
ipsnews.net/news.asp?i...
----------------------...
"Across the ocean, along the southwest African coasts of Angola, Congo and Namibia, there are similar amounts of oil. The Latin American and African coasts share a common geological formation which was split apart by the South Atlantic ocean, which separated the continents in prehistoric times, Mello, who has been studying the subject for 10 years, told IPS.

There is a correspondence between the oil reserves in the Brazilian Campos basin and those in Angola. Both contain about nine billion barrels of oil, and a similar pairing appears likely between Namibia and the Santos basin, the expert said."
----------------------...
But the sub-salt in Angola hasn't even been touched yet:
www.rigzone.com/news/a...

This likely also means that the large oil deposits off the coast of Nigeria and Equatorial Guinea are matched by (as yet undiscovered) large deposits off Brazil's northeastern coast.

But we're not done when we're talking about Brazil. Go south. How does 60 billion barrels off the coast of the Falkland Islands sound?
www.spiegel.de/interna...

Some nice prospects to follow in several companies' Falkland leases:
www.fogl.com/investor/...
www.desireplc.co.uk/te...
www.rockhopperexplorat...
www.bordersandsouthern...

Now let's see . . . lots of oil off the coast of Brazil. Almost certainly lots of oil off the coast of the Falklands. Now connect the dots. Between those two are two other countries beginning with a 'U' and an 'A'. 'A' in particular has a large coastline. Hmm, I wonder what's down there.

But we still aren't done. Back to the west coast of Africa we head north from the recent discoveries in Ghana. Guess what? There's lots more almost certain to be discovered:
investors.hyperdynamic...

Next, starting in Guinea, trace the cross-Atlantic ridge lines on google-map's satellite view and you get to the Lesser Antilles. We already know there are large natural gas deposits off the coast of Trinidad and Tobago. Maybe the folks in Antigua and Dominica should start drilling.

All this - and I've only discussed the South Atlantic! If you're tired of reading about offshore deposits you can peruse this for your entertainment:
www.energyinvestmentst.../

Apr 15 09:20 PM

[Carlos Lam:]

Jim is right about agriculture. Pork consumption in China, for example, rose 20% between '02 and '06. In the next 20 years, a good chunk of the billion or so Chinese will join the ranks of the middle class and be able to buy more food (long-term, though, China will have a demographic problem caused by the foolish one-child policy). Conversely, supply IS declining:

* The average age of the American farmer is 55
* There are only about 2 million farms left from a peak of about 7 million in 1935

Apr 15 11:21 PM

[OilFinder:]

Actually, Jim is wrong about agriculture, too.

World corn production:
www.cbot.com/cbot/pub/...

World soybean production:
www.cbot.com/cbot/pub/...

World wheat production:
www.cbot.com/cbot/pub/...

All have kept pace with population growth - and then some.

The number of farmers has nothing to do with production. You simply get fewer farmers tending larger farms. In fact that's probably a more efficient way of growing food (economies of scale, less land taken up by housing/farmsteads, etc.). In spite of - or because of - larger farms and fewer farmers the US has been . . .

. . . growing more corn:
www.cbot.com/cbot/pub/...

. . . growing more soybeans:
www.cbot.com/cbot/pub/...

. . . growing about the same amount of wheat:
www.cbot.com/cbot/pub/...

As for the future, Brazil could double its crop output without cutting a single tree:
www.bloomberg.com/apps...

And in Russia and the FSU lies huge swaths of underutilized and unutilized farmland:
www.telegraph.co.uk/fi...
www.nytimes.com/2008/0...
----------------------...
"Today, roughly 7 percent of the planet’s arable land is either owned by the Russian state or by collective farms, but about a sixth of all that agricultural land — some 35 million hectares — lies fallow. By comparison, all of Britain has 6 million hectares of cultivatable land."
----------------------...

If Jim Rogers wanted to spend his money wisely on agriculture he'd be developing unused farmland in Russia rather than speculating on wheat futures.

Apr 16 12:48 AM

[mkreisel:]

I agree that number of farmers has nothing to do with agricultural production.

The US has 3% of its population working in agricultural and is the biggest exporter of basic food items.

Last year Ukraine spent a little more fertilizers and saw its wheat production jumping 70%.

Potential for production increase is huge in developing economies.

Apr 16 02:14 AM

[yank:]

Oilfinder:
No one disputes that there is oil out there. Even Rogers will admit there i smore oil to extract. But the main point is that the easy, cheap oil is now gone. And with oil prices in the $40s it is no longer viable to explore deep-sea reserves. Until oil prices stabilize somewhere above $70-75 there will be no major drilling undertaken. It's all about the economics of drilling. Unless these E&P companies can earn a profit it doesn't mater what the supply/demand imbalances are.

Yank


On Apr 15 09:20 PM OilFinder wrote:

> Jim Rogers is a fool. If he thinks there haven't been - and won't
> be - any major new oil discoveries I'd suggest he start paying attention
> to the news.
>
> How does 100 billion barrels of recoverable oil in the Santos basin
> offshore Brazil sound?
> www.ft.com/cms/s/0/d98...
>
> And that is *just* in the Santos basin. The entire coast of Brazil
> is lined with hydrocarbon-rich basins, the majority of which have
> only lightly been explored. The governor of one northern Brazilian
> state believes his coast has similar deposits to one of Brazil's
> other big oil-producing basins, and he is probably right:
> www.bloomberg.com/apps...;sid=aIhOjFb14A4I&...
>
> Why is he probably right? Because his state used to be attached to
> the west coast of Africa - particularly Ghana - where they're just
> starting to make large discoveries:
> blogs.wsj.com/environm.../
>
> www.thestatesmanonline...;section=2
>
> For those who don't understand, South America and Africa were once
> attached but separated starting in the Jurassic. This was when the
> sediments eventually forming the oil began to deposit. If there is
> an area off the western coast of Africa with large oil deposits,
> there is a very high probability of a "twin" along the South American
> coast. And vice-versa. For example, the presence of large sub-salt
> reserves off the southeastern coast of Brazil almost certainly means
> similar deposits off the coasts of Namibia and Angola;
> ipsnews.net/news.asp?i...
> ----------------------...
> "Across the ocean, along the southwest African coasts of Angola,
> Congo and Namibia, there are similar amounts of oil. The Latin American
> and African coasts share a common geological formation which was
> split apart by the South Atlantic ocean, which separated the continents
> in prehistoric times, Mello, who has been studying the subject for
> 10 years, told IPS.
>
> There is a correspondence between the oil reserves in the Brazilian
> Campos basin and those in Angola. Both contain about nine billion
> barrels of oil, and a similar pairing appears likely between Namibia
> and the Santos basin, the expert said."
> ----------------------...
> But the sub-salt in Angola hasn't even been touched yet:
> www.rigzone.com/news/a...
>
> This likely also means that the large oil deposits off the coast
> of Nigeria and Equatorial Guinea are matched by (as yet undiscovered)
> large deposits off Brazil's northeastern coast.
>
> But we're not done when we're talking about Brazil. Go south. How
> does 60 billion barrels off the coast of the Falkland Islands sound?
>
> www.spiegel.de/interna...
>
>
> Some nice prospects to follow in several companies' Falkland leases:
>
> www.fogl.com/investor/...
> www.desireplc.co.uk/te...
> www.rockhopperexplorat...
>
> www.bordersandsouthern...
>
>
> Now let's see . . . lots of oil off the coast of Brazil. Almost certainly
> lots of oil off the coast of the Falklands. Now connect the dots.
> Between those two are two other countries beginning with a 'U' and
> an 'A'. 'A' in particular has a large coastline. Hmm, I wonder what's
> down there.
>
> But we still aren't done. Back to the west coast of Africa we head
> north from the recent discoveries in Ghana. Guess what? There's lots
> more almost certain to be discovered:
> investors.hyperdynamic...
>
>
> Next, starting in Guinea, trace the cross-Atlantic ridge lines on
> google-map's satellite view and you get to the Lesser Antilles. We
> already know there are large natural gas deposits off the coast of
> Trinidad and Tobago. Maybe the folks in Antigua and Dominica should
> start drilling.
>
> All this - and I've only discussed the South Atlantic! If you're
> tired of reading about offshore deposits you can peruse this for
> your entertainment:
> www.energyinvestmentst.../
>

Apr 16 09:47 AM

[kelm:]

You are missing the point on agriculture as well. Grain production may keep pace with population numbers but that does not mean it keeps pace with lifestyle. Rising standards of living mean higher feed stock requirements for livestock. The most costly input into agriculture is energy and that is going up as the new deposits are expensive to tap and the investment curve is lagging the likely demand curve.



On Apr 16 12:48 AM OilFinder wrote:

> Actually, Jim is wrong about agriculture, too.
>
> World corn production:
> www.cbot.com/cbot/pub/...
>
> World soybean production:
> www.cbot.com/cbot/pub/...
>
> World wheat production:
> www.cbot.com/cbot/pub/...
>
> All have kept pace with population growth - and then some.
>
> The number of farmers has nothing to do with production. You simply
> get fewer farmers tending larger farms. In fact that's probably a
> more efficient way of growing food (economies of scale, less land
> taken up by housing/farmsteads, etc.). In spite of - or because of
> - larger farms and fewer farmers the US has been . . .
>
> . . . growing more corn:
> www.cbot.com/cbot/pub/...
>
> . . . growing more soybeans:
> www.cbot.com/cbot/pub/...
>
> . . . growing about the same amount of wheat:
> www.cbot.com/cbot/pub/...
>
> As for the future, Brazil could double its crop output without cutting
> a single tree:
> www.bloomberg.com/apps...;sid=a3lNfQ7MDF0E&...
>
>
> And in Russia and the FSU lies huge swaths of underutilized and unutilized
> farmland:
> www.telegraph.co.uk/fi...
>
> www.nytimes.com/2008/0...;oref=slogin
>
> ----------------------...
> "Today, roughly 7 percent of the planet’s arable land is either owned
> by the Russian state or by collective farms, but about a sixth of
> all that agricultural land — some 35 million hectares — lies fallow.
> By comparison, all of Britain has 6 million hectares of cultivatable
> land."
> ----------------------...
>
> If Jim Rogers wanted to spend his money wisely on agriculture he'd
> be developing unused farmland in Russia rather than speculating on
> wheat futures.

Apr 16 11:18 AM

[OilFinder:]

@Yank,

Petrobras tells us its sub-salt oil deposits are profitable as low as $40:
www.bloomberg.com/apps...
No reason to expect other offshore projects to be any different. BP's Thunder Horse project, now in operation and extracting oil and gas from 20,000+ feet deep, was discovered and planned when the price of oil was lower than it is now. Same with other deepwater projects in the Gulf of Mexico which have recently gone into operation, or will soon be so. All these were discovered and planned around 2000 or shortly afterwards when oil was around $20 or $30.

In addition, please read the link I provided on Iraq. Iraq's oil is precisely the "easy, cheap oil" you spoke of - and there appears to be Saudi-sized resources there. Between Iraq and the various deepwater sources I described, you will have large amounts of oil which can break even at $10 or $20 (Iraq) and $40 (deepwater) coming online over the next several years. Throw in an additional $10 for a 20% profit margin on the deepwater, and you have ample supplies of oil at $50. If you consider $50 oil to be expensive, then so be it.

Finally, don't forget that supply is only half the equation. You might want to read a bit about the demand half:
online.wsj.com/article...

@Kelm,

Please peruse my links on Brazil and Russia, especially Brazil. Then you need to read the USDA's write-up here:
www.fas.usda.gov/pecad.../
Pay particular attention to the "Land Resources" and "Agricultural Expansion Potential" sections. We're talking about staggering amounts of land here, some of which has undergone development over the past several years, but with still much more left to go. Then, regarding the energy inputs you mentioned, read reply to Yank above.

Apr 16 11:46 AM

[grh1212:]

Excellent posts, Oilfinder. You obviously have considerable knowledge and understanding of the macro geology and likely locations of natural resources, especially oil. Your knowledge of worldwide famland availability is also impressive. Thank you for generously sharing your insights in these matters and posting sources for further information. Your input is what SA is all about.


On Apr 16 12:48 AM OilFinder wrote:

...

Apr 16 01:43 PM

[yank:]

Finder:
I don't buy the "demand destruction" myth for one second. We are in the midst of a temporary "delevering" that has affected oil demand. Once recovery begins in the 2nd half of 09 oil demand will rise accordingly. What you also left out of your analysis (which was excellent by the way) is yes there is all this oil but what about:

-the collapse in production at Mexico's Cantarell Field (Mexico is 3rd largest exporter of oil to the US)
-Virtual complete shutdown of oil sands expansion work in Alberta as oil prices plummeted (Canada is the largest exporter of oil to the US)
-North Sea production has come to a complete standstill.
-Alaskan Slope production is declining precipitously.

So all of that "new" oil you are talking about is great but it will be nothing more than a susbstitute or replacement for existing production that has been lost due to collapsing prices and field declines. In other words we are running on a treadmill NOT finding additional production which will meaningfully impact supply.

Yank


On Apr 16 11:46 AM OilFinder wrote:

> @Yank,
>
> Petrobras tells us its sub-salt oil deposits are profitable as low
> as $40:
> www.bloomberg.com/apps...;sid=ayewS28nNJtc&...
>
> No reason to expect other offshore projects to be any different.
> BP's Thunder Horse project, now in operation and extracting oil and
> gas from 20,000+ feet deep, was discovered and planned when the price
> of oil was lower than it is now. Same with other deepwater projects
> in the Gulf of Mexico which have recently gone into operation, or
> will soon be so. All these were discovered and planned around 2000
> or shortly afterwards when oil was around $20 or $30.
>
> In addition, please read the link I provided on Iraq. Iraq's oil
> is precisely the "easy, cheap oil" you spoke of - and there appears
> to be Saudi-sized resources there. Between Iraq and the various deepwater
> sources I described, you will have large amounts of oil which can
> break even at $10 or $20 (Iraq) and $40 (deepwater) coming online
> over the next several years. Throw in an additional $10 for a 20%
> profit margin on the deepwater, and you have ample supplies of oil
> at $50. If you consider $50 oil to be expensive, then so be it.<br/>
>
> Finally, don't forget that supply is only half the equation. You
> might want to read a bit about the demand half:
> online.wsj.com/article...
>
> @Kelm,
>
> Please peruse my links on Brazil and Russia, especially Brazil. Then
> you need to read the USDA's write-up here:
> www.fas.usda.gov/pecad...;br/>Pay
> particular attention to the "Land Resources" and "Agricultural Expansion
> Potential" sections. We're talking about staggering amounts of land
> here, some of which has undergone development over the past several
> years, but with still much more left to go. Then, regarding the energy
> inputs you mentioned, read reply to Yank above.

Apr 16 02:22 PM

[OilFinder:]

@Yank,

1. Keep in mind that the WSJ article I linked has ExxonMobil telling us US demand will decline significantly, not the government. If you read the entire article the rationale makes perfect sense (especially the part about CAFE standards increasing). If the world's largest oil company is telling us that demand for their own product in their largest market is likely to decrease significantly, that's worth paying attention to. Demand will certainly increase elsewhere, but since the US consumes 20%-25% of the world's oil, you're going to need some very hefty increases in demand from these other places to just make up for the declining consumption in the US. And even large-scale increases in demand from the China's and India's of the world aren't guaranteed to be as large as many predict, because they, just like us, are concerned about their environment and their "energy independence."

2. The decline in production from Cantarell can - and to a great extent already is - being made up with increased production from Brazil and elsewhere. Per my comments in my first post above, keep your eyes peeled on Brazil in particular. 100 billion recoverable barrels in Brazil's Santos basin will more than make up for the loss of the 10-15 billion barrel Cantarell field. Start by reading this - it's already starting to happen:
www.bloomberg.com/apps...

3. Regarding oil sands projects, first of all read #1. Since the main export destination of Canadian oil sands output is the US, if the US is going to decrease consumption by some 30% over the next 2 decades, clearly the need for that Canadian oil will not be so imperative. Second, not all oil sands expansion projects are being put on hold. Some are actually proceeding as planned. Here are some recent examples:
www.rigzone.com/news/a...
www.rigzone.com/news/a...
www.rigzone.com/news/a...
www.rigzone.com/news/a...

Venezuela has similar (and similarly large) oil sands deposits of its own. Chavez has recently been making a large effort to begin developing these, with the help of companies from China, India, Japan, the US and elsewhere. I can provide links if you desire.

Apr 16 04:03 PM

[OilFinder:]

Incidentally, here's another one. Not everyone is shelving all their investments, there are still plenty of companies shelling out big $$ for oil exploration and production projects:
www.rigzone.com/news/a...

- $174.4 billion in investments over the next 5 years, $28.6 billion this year alone
- contracted 12 rigs/drillships last year, is about to contract out another 28 over the next 5 years. Around $600 million each
- expects to add 8-10 billion barrels in reserves this year alone
- already secured financing for most of its expenditures for the next 2 years, even got a $10 billion line of credit from the Chinese

These numbers alone should tell you they're expecting big things off the coast of Brazil in the near future.

Apr 16 04:40 PM

[T. Marc Sch...:]

Jim Rogers has some interesting input here. Good article. Here is another article from a blog that talks about Jim Rogers and his agriculture ideas. farmlandforecast.colvi...

Apr 23 12:52 PM