What Does This German Bank Know About Agriculture?
Aug 13th 2012 6:42PM
Updated Aug 13th 2012 6:48PM
Looking at news today, you'd think there was one ear of corn left in the world. Prices for the golden kernels are reaching all-time highs, and since the beginning of the year, an investment in Teucrium Corn Fund, which tracks corn futures, would've returned 23% compared with the market's 12%. This makes investing in agricultural seem like a profitable enterprise.
But if it is, why has Germany's Commerzbank (NASDAQOTH: CRZBY.PK) removed agriculture products from its commodity index fund?
The bank, according to Reuters, gave no details on the move. In its silence, nonprofit Foodwatch claims that the move is an ethical consideration relating to studies that have shown bank speculation drives up food prices and contributes to world hunger. Here's a look at the recent price run-ups:
In a previous article, I looked into whether banks actually drove up food prices. The argument is whether trading in futures affects the spot, or current, price. Some argue that the fundamental supply and demand of commodities is unaffected by dabbling in futures contracts, and therefore no matter how much futures are bid up, the immediate price will be unaffected.
Opponents claim that today's prices depend on futures contracts and the greater volatility in prices increases the transaction costs of participating in the futures market -- which could be passed on to the consumer.
The conclusion of a report on the issue from the Organization for Economic Cooperation and Development stated that "the weight of the evidence at this point in time clearly tilts in favor of the argument that index funds did not cause a bubble in commodity futures prices." And the St. Louis Fed concluded that "commodity prices rose in markets with and without index funds." But Commerzbank's move to withdraw from a potentially lucrative market without explanation brings more questions to the debate.
A good move nonetheless
While the argument will continue, disassociating the bank's practices with a potential societal ill is a great move. Food prices are said to have contributed to riots around the world -- such as in Egypt, where citizens spent 40% of their paychecks to eat. For comparison, in the U.S. that figure is 7%. Commerzbank will remove any association with these troubles, truly responsible or not.
In a time when banks struggle for a positive image, this gives Commerzbank a point of differentiation. Every week it seems a new bank makes headlines for poor behavior. The year started with JPMorgan Chase's (NYS: JPM) "London Whale" incident, in which a trader took on huge bets that were misreported in financial filings, with losses of almost $6 billion. The bank even had to stop share buybacks because of the mess. Recently, the LIBOR scandal, in which traders artificially set a key interest rate, has engulfed Barclays, forcing both its chairman and CEO to resign and costing the bank $450 million in fines. Other banks involved include Royal Bank of Scotland (NYS: RBS) , which has fired employees over the investigation; UBS (NYS: UBS) , already in the headlines for a rogue trader who lost $2.3 billion last year; and Citigroup (NYS: C) , whose former CEO recently recommended breaking up big banks.
Not to mention the recent accusations against Standard Charter for illegally transacting with Iran.
The good, the bad, and the profitable
Will Commerzbank's move greatly affect its business? For small size of the $145 million fund that it altered compared with its $8 billion size, even if customers noticed, the change would most likely be infinitesimal. Removing the target off its back for protestors, however, could make the bank seem more stable to both investors and customers -- especially in today's banking sector.
While the other banks continue trading arcane products, derivatives, and futures, there are plenty of stocks that the small investor can grab from under the banks' noses. For a sample of such stocks, check out our free report: "Middle-Class Millionaire-Makers: 3 Stocks Wall Street's Too Rich to Notice."
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