The Macquarie and Rogers China Agriculture Index is an investable index that will track price changes of the market “basket” of the agricultural commodities most commonly consumed in China. Macquarie Funds is the asset management arm of Australia’s Macquarie Group.

Macquarie actually created the product in November, and continued to operate it in December, when the China agricultural index posted a return of better than 11% – outperforming most agricultural indices and handily besting most stock markets in that part of the world, Asian Investor reported. That provided Macquarie Funds with the two-month performance needed to actually launch and start marketing the index.

“Apart from being the world’s most populous nation, China is [also] one of its fastest-growing and as such, Chinese dietary patterns should play an influential role in determining the prices at which agricultural produce is exchanged” Harry Krkalo, Macquarie Funds’ Singapore-based head of Asian retail funds sales, told Asian Investor. “Developing an investable index which effectively tracks the price changes of commodities with reference to the quantities of each agricultural product consumed in China is an innovative and exciting way to invest in the sector.”

Indices that track commodities are usually calculated utilizing so-called “supply-side” factors, and the commodity weightings are based on global production. The Macquarie and Rogers China Agriculture Index is unique because its component weightings are determined using current and projected data on commodities consumption in China.

The index allows investors to track – on a daily basis – the price changes of the agricultural commodities basket, and will ultimately enable investors to capture the price impact of current and potential changes in China’s food consumption patterns. What’s more, it also allows fund managers and other marketers of financial-services products to create and sell financial products that are linked to this innovative and topical theme. It uses exchange-traded futures contracts on physical commodities to do so.

The China agricultural index is the first one manufactured in Asia by Macquarie Funds, which is trying to use its geographic location to its advantage, and bolster its Asian presence. As of the end of September, Macquarie Funds had $53 billion in assets under management worldwide, including $1.5 billion sourced from investors in Asia.

“Macquarie is a leader in trading commodities futures. Jim Rogers has worked with other groups before but nothing specifically with China,” says Krkalo. “So when we put those bullet points down, a Chinese consumption-based product made sense and it is an interesting first index for us to roll out.”

From Investor to Icon

Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

It was after Rogers “retired” in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as “Investment Biker” and the just-released “Bull in China.”

He also made some historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that fueled a year-long bull market in the agriculture, energy and mining sectors.

Rogers’ prescience is well known, and his candor and willingness to criticize the bailout strategies under way in Washington means that his comments almost always receive substantial media coverage.

Rogers sat down for extended conversations with Money Morning Investment Director Keith Fitz-Gerald twice in the past year. For the first of those two interviews, Fitz-Gerald traveled from his Oregon home all the way to Singapore, where Rogers now lives with his family. Rogers warned investors that there were tough times ahead for the U.S. dollar, and for the nation’s central bank.

In the second interview, Fitz-Gerald met with Rogers in Vancouver, British Columbia, where both were to speak at a major wealth management conference. During that April discussion, Rogers warned Money Morning readers that the U.S. financial crisis was destined to grow much worse – an assertion that echoed Fitz-Gerald’s own predictions and that’s also proved to be highly accurate.

In all his discussions, however, Rogers remains highly bullish on two things: China and commodities. The new index addresses both.

“I bought more [commodities] recently. I know that one of the few bull markets that I can see going up in the next five to 10 years is in agriculture,” Rogers said. “You may not have bull markets in cars or financial institutions or lots of other things, but I know the world is not going to stop eating.”

Roller-Coaster Ride for Commodity Prices

Commodity prices across the board have been whipsawed over the past two years. Food-and-energy prices soared in the last part of 2007 and continued their climb in the first part of 2008. In fact, as Money Morning reported in early April, food prices rose so far and so fast in the early part of last year that the leader of the United Nation’s World Food Programme warned that a “silent tsunami” of hunger was sweeping the globe.

But after the world commodities markets sold off sharply for most of the last half of last year, a committee made up of Rogers and key members of the treasury and commodities team in Macquarie Funds created the index.

“Macquarie is one of the largest traders of agricultural commodities globally and Jim Rogers is one of the world’s leading commodity investors so it’s a great partnership,” Matthew Long, Sydney-based executive director of Macquarie Funds, said in an interview with Asian Investor. “The index methodology is a refreshing way to approach investing in commodities and over time we believe that consumption patterns, particularly those of China, will increasingly influence agricultural prices. We expect the index to perform quite differently from existing agricultural indices.”

Macquarie Funds plans to launch, in the near future, a series of funds linked to the Macquarie and Rogers China Agriculture Index in the Asian region in addition to issuance in Switzerland, according to published reports.

“The investing public is still worried about where to put their money so any product launch for the next six months is going to be a carefully thought-out launch,” Krkalo says. “But this commodities index is interesting for both short-term and long-term reasons.”

In view of the projected demand for food over the next decade – especially with the emergence of the world’s largest middle class, taking place right now in China – the decline in food-based commodities was badly overdone, Macquarie’s Krkalo says. From a profit standpoint, the short-term opportunity stems from attractive valuations, while the long-run outlook is all about massive and growing global demand.

Krkalo and Rogers both make a strong case that everyone should be invested in commodities. Even with the big decline in prices that took place in the last half of last year, here in the U.S. market alone, for instance, prices for food in U.S. grocery stores jumped 6.6% last year – the biggest spike since 1980. If anything, that underscores yet again that inflation is a much bigger problem than government officials, or most economists, say it will be. It also calls into question the veracity of the statistics that say there was such a drop-off in prices.

Last year was the second one in a row in which U.S. consumers were forced to pay a lot more for their groceries, Money Morning reported. In 2007, food prices at supermarkets rose 5.6%. Prices rose only 1.4% in 2006.

Of all food categories, prices for cereal and baked goods hit U.S. consumers the hardest, zooming 11.7% in 2008 over 2007. Prices for meats, poultry, fish and eggs gained 5.1%. Fruits and vegetable rose 3.4%, while dairy products advanced 2.7%.

Asia’s Promise

Commodities indices actually outperformed stock markets in December, with the Dow Jones-AIG Agriculture Total Return Index and the Macquarie and Rogers China Agriculture Index posting returns of approximately 9.8% and 11.6% respectively, Asian Investor reported.

Most major Asian stock-market indices – including Japan’s Nikkei 225, Hong Kong’s Hang Seng, MSCI Singapore, Kospi 200 and the MSCI Taiwan – posted positive returns, the largest of which was the Kospi 200 with a performance of around 6.2%.

The worldwide financial crisis and the sell-off in stocks that’s resulted have singed the mutual-fund industry. Mutual-fund assets in Asia – excluding Japan – could drop by nearly 20% this year, and won’t equal last year’s record levels until 2010, Boston-based financial researcher Cerulli Associates reported back in October.

Assets in Asian funds soared 86% to $1.126 trillion in 2007, before dropping 12% in the first half of last year. Macquarie’s Krkalo told the China Daily that when markets improve, the region’s investors would scramble to find opportunities.

“Asian investors are really quick to move,” Krkalo said.

Asia’s fund industry is dominated by such heavyweights such as ING Groep NV (ADR: ING), Schroders PLC, JPMorgan Chase & Co.’s (JPM) JF Asset Management unit, and Prudential PLC, as well as Nomura Holdings Inc. (ADR: NMR) and Citigroup Inc.’s (C) Japan-based Nikko Asset Management unit, which the U.S. banking giant is trying to sell.

Source: New Index Combines Jim Rogers’ Top Two Profit Plays: Commodities and China

But let’s start with the financial news first. Macquarie Group (ASX:MQG) told investors yesterday that its profit fell by 43%, thanks to write downs in assets. It was the first time since going public twelve years ago the “Millionaire Factory” has reported an earnings decline. Still, the $604 million profit number was higher than what analysts were expecting ($594 million) and the stock finished up over 16.5% on the day.

In the revenue results and write downs you can see how the decline and fall of the investment banking model has hit Australian shores. MQG reported a 13% decline in fee and commission income (to a paltry $2.2 billion). Trading income fell by 14% to $722 million. The big one was the 43% decline in income from asset and equity investments.

There were some strange assets in the back rooms of the Factory. The company took over a billion dollars in write downs on its Italian mortgages and fund management assets. It did not, however, take any write downs on Macquarie Airports or Macquarie Infrastructure Group. Hmmn.

Picture the good ship Macquarie Group as something like a Noah’s Ark/Pirate Ship full of a menagerie of debt-financed assets. Under Captain Allan Moss as CEO, Australia’s version of Goldman Sachs sailed the high-seas of global finance, buying assets with borrowed money, bundling them into funds, and then charging retail investors fees to invest in the funds. It’s the sort of business those Somali pirates who hijack oil tankers should look into. Far more lucrative.

Twelve years of collective booty and swag gave the Factory quite a collection of eccentric and fee-generating assets. Some of those assets are not ageing so well. But you’ll note the company chose not to mark down the value of its infrastructure or airport funds, the two big ones.

It claims the current market value of those assets isn’t what they are really worth. The book value is more accurate. In the meantime, it is throwing other less attractive assets overboard. Deck chairs…Italian mortgages…extra chickens…everything must go!

There’s no doubt that asset values are likely to fall more next year and that revenues will continue to fall too. Still, the company says it will sell $15 billion in assets and then set sail, on the lookout for more acquisitions again. Garn!

It’s looking to sell its margin lending book. And new CEO Nick Moore said it will securitise its motor vehicle loan book, move it off the balance sheet, and sell it off. Thus the liquidation continues in the financial world. Loss-making assets are written down or thrown overboard at…er…fire sale prices.

What’s really happening, mixed metaphors aside, is that the Millionaire Factory model is giving way to deleveraging reality. In a world with falling asset values and tighter bank credit, it’s harder (and much less profitable) to build a cleverly constructed portfolio of assets and generate fee income from operating them.

In the post-credit crunch world (or post-Deluvian, if you accept the nautical metaphor), you have to focus on cash, not debt. One example would be Cash Converters, a sort of Main Street Macquarie, without the debt, and substituting Italian loafers for Italian mortgages. Cash Converters buys low and sells high. It’s the perfect business for the first world depression.

Cash Converters helps people turn lazy assets (guitars, mobiles, stereos, old harmonicas) into cash. And what is that but the liquidation of the consumer spending boom? Of course, most stuff isn’t worth as much people think it is. When you own something, you tend to think it’s worth more than everyone else.

Then you try and auction it on eBay or take it to a pawn shop or Cash Converters. There, you find that it’s worth a lot less than you believed in your heart. Such is life, as Ben Cousins and Ned Kelly might say. Kris Sayce at the Australian Small Cap Investigator (whom we often call the Ned Kelly of the Old Hat Factory) has been looking at Cash Converters as an example of what he calls “Main Street Stocks.”

We’ll let you know what he’s up to…but we think it has something to do with companies that actually do more business in a recession and increase both revenues and earnings-without relying on debt. If you have your own suggestions for “Main Street Stocks,” let us know at dr@dailyreckoning.com.au

Dan Denning

Source: Macquarie Group (ASX:MQG) Profits Fall By 43%

Nickel had a couple of steep ups and downs, but eased off of both highs and lows, closing at $11.7291/lb., down 6¼ cents. Zinc fell from the pre-dawn hours until mid-morning, then came off its lows to end at $1.0222/lb., down 3 cents. Aluminum was down early but traded sideways for the New York day, eventually losing a penny and a quarter, to $1.338/lb., while lead was off straight through, barely edging above its intraday low at $1.0113/lb., down more than 3¾ cents.

Copper fell off primarily on stock increases. Inventories monitored by the LME gained a healthy 1,500 metric tons yesterday, to 122,725 tons.

Analysts believe that there has been some retracing of speculation as to how much extra demand will emerge from China for reconstruction efforts in the wake of last week’s devastating earthquake.

Some are arguing that that copper demand may not take too much of a boost from reconstruction work, because the worst hit areas were largely suburban rather than industrial.

Likewise, traders were downplaying any effect that earthquake-related smelter closings would have on zinc supply. The shutdown may result in production suspension of 15 days or more, but affects less than 1% of China’s annual output, according to a report from the Macquarie Group.

“This minor cut in supply is unlikely to significantly reduce the surplus that we were forecasting for the zinc market for 2008,” the Macquarie analysts said.

Backing up that view were the latest figures from the LME, which reported that its zinc inventories grew by 5,075 tons yesterday, to 128,575 tons. It was the biggest daily gain since January 18.

In company news, the website metalmarkets reports that Rio Tinto is facing a potential boycott of its iron ore by Chinese steelmakers.

“Problems have arisen because,” the report said, “last year Rio made use of flexibility clauses in its contracts, that allowed the group to charge spot market prices for iron ore, at around 10% above the prices set in its contracts.”

A dicey situation, the report concludes: “While a joint action by the Chinese steel industry to boycott Rio’s spot sales could be deeply damaging to the company it would also put China in breach of World Trade rules.”

Source: Base Metals All Sink