Interview with Ashmead Pringle: Part II

This segment was taped at the American Stock Exchange, which offers trading across a full range of equities, options and exchange-traded funds.

Ashmead Pringle is the President and Founder of GreenHaven Commodity Services, an Atlanta-based firm that recently launched its first ETF on the American Stock Exchange. That fund, tied to an old version of the CRB Index, offers equal-weighted exposure to the commodities market.

I am here with my guest Ashmead Pringle, who is the Founder and President of GreenHaven Commodities Services, which has just launched a new ETF, GreenHaven Continuous Commodity ETF. I want to talk a little bit about the advent of something we’re seeing now for the very first time. You have very large institutional investors, pension funds, endowments coming in the commodity markets in a huge way, because it is perceived now as a new or perhaps a viable asset class, wielding hundreds of billions of dollars if not trillions of dollars. What impact is this having on commodity prices?

Ashmead Pringle, President and Founder, GreenHaven Commodity Services (Pringle): Well, it’s having a big impact, Mike, no question about it. As more money comes into these markets, which have traditionally been quite small relative to equity and bond markets, it has really pushed prices up just by the demand for ownership.

Endowments and pension funds and others, as you say, are increasingly allocating to commodities as an asset class because of their historically low correlation with equities and their role as a hedge against inflation and a weak dollar. I think in some part the success of big endowments like Harvard and Yale with their investments, not necessarily in futures but in real assets [has driven this trend]. In 2006, Yale had 23% I think in real assets. Portfolio managers see that success and they’re allocating to commodities.

What’s happening in the futures markets of course is that the exchanges have largely gone public and, over the last year, most of the trade at the NYMEX and in the Chicago markets has gone electronic, moving away from the floor. That is good; it needs to do that to accommodate these greater volumes. The open interest―in effect, the market cap of futures contracts―has tripled and will continue to get bigger, and the exchanges by going public have attracted the capital they need to provide secure clearing for these instruments.

Norman: One of the things that has been curious to me as an observer and somebody who’s also been in commodities, we’re told that we’re in shortage for a lot of these commodities. Yet I see the structure of the futures markets; many of them are in a contango situation where futures prices trade for higher than spot prices. How could that be if we’re really in a shortage? Wouldn’t we be in an inverted situation?

Pringle: Well, it depends on the commodity, Mike. In the case of the precious metals, we’re always in contango essentially, just because of the interest costs being storage. In some other markets we have seasonal factors: in the grains with new crop/old crop, and in livestock we have some other factors.

But in general I’d agree with you. If we’re short a particular commodity, we should see a backwards market and not a contango market.

Norman: Is this because of all this investment money coming in? Is it somehow distorting the nature of the markets themselves?

Pringle: I think that it has. Many of the index funds―and we have I think over $150 billion tracking different indices now―a lot of those indices have been front-loaded in futures. They’ve been tracking front-month futures and so there’s been a big roll effect as those funds had to sell their nearby positions and replace them with more discounts.

Norman: But in a contango [environment], aren’t they losing money? There’s a negative roll yield there.

Pringle: Exactly right; there is a negative roll yield in a contango market, and it’s been of concern to some of these funds, and they have changed their formulas for rolling some of them to a more optimum yield strategy with the flexibility now to pick what month they go to, not just the next one. In particular, the CCI Index is spread across the near six months of the future curve at each case; it’s not as front-loaded an index as some of the others.

Norman: I remember last year when oil prices were shooting towards, well, at that time $80-$85/barrel. The widely traded ETF―I think USO is its symbol―it actually was going down, reflecting that negative roll yield every month. So it’s something to be aware of, right?

Pringle: Absolutely, and it was even worse in natural gas last year. The roll yield in natural gas was really a very stiff headwind.

Norman: But since then, I believe the energy markets have flipped around. How much of the agricultural price increases that we’ve been seeing now do you think is due to the whole biofuels thing?

Pringle: Well, certainly some I think, Mike, but I think it’s overplayed. Corn for ethanol is taking 30% of the corn crop. But you know, the U.S. is fortunately the Saudi Arabia of corn.

Norman: All right, there you go. Ashmead Pringle, thank you very much for being on the show.

Pringle: My pleasure.

Click here to watch Part I of the Ashmead Pringle Interview.