Global Commodities Outlook

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#41
‘End of rout’ has miners on a roll

Matt Chambers
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Resources Reporter
Melbourne


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Mining and energy stocks. Source: TheAustralian


[b]Mining and energy stocks have soared from multi-year lows this month on growing bets that depressed metals and oil markets have finally bottomed, with investors adding $45 billion to the value of the nation’s ailing resources companies.[/b]
The ASX 200 energy index has soared 17 per cent in October, led by Queensland LNG proponent Santos with a 50 per cent gain to an eight-week high of $5.97.
In the same period, materials stocks are up 12 per cent, with copper miner OZ Minerals taking the lead, up 35 per cent to a three-month high of $4.47 after private equity firm KKR took a stake in the company. Both indices are back at two-month highs after the energy index hit a 10-year low and the materials index a seven-year low at the end of last month.
Investors are getting back into the mining giants too, with BHP Billiton up 15 per cent to $25.60 and last week logging its biggest weekly gain (13 per cent) since 2008. Rio Tinto is up 13.5 per cent this month to $55.18.
The move is a sharp reversal from the resources rout on September 30, when more than $13bn was wiped from resources stocks and BHP and Rio were sent to seven-year lows. The stock-price gains have outpaced commodities price increases because of the view that mining and energy stocks had fallen further than the price of their products justified.
“More in the market are thinking we are seeing the bottoming in resources, with a few forecasters last week calling just that,” said Reg Spencer, Canaccord ­Genuity head of Australian mining research.
“The other thing in investors’ minds is what is happening with Glencore — they cut zinc production in Australia and there is perhaps an expectation more marginal commodities operations will shut, which could provide supply side support for metal prices.”
On Friday, Glencore announced it would cut one-third of its global zinc production, adding to recent cuts to its copper and coal production.
Canaccord’s global strategists last week moved the energy and mining sectors from underweight to “equal weight”, saying they thought they were close to the bottom.
At the same time, Morgan Stanley’s London mining analysts raised their view on the sector from “in-line” to “attractive”.
“Emerging markets and China in particular remain key to ­commodities demand and in the next few months we expect the perception around this demand to improve,” Morgan Stanley said.
“In particular, the acceleration of financial and administrative stimulus policies in China in recent weeks should start to feed through in both actual activity ­levels and equity market expec­tations.”
Morgan Stanley says weaker balance sheets and tighter credit markets have accelerated supply cuts and that this would continue for higher-cost operations, adding to supply-side pressure.
Still, iron ore prices, which have held steady in the mid-$US50 a tonne range for the past couple of months, remain a major risk to the outlook, with new supply about to come on, including from Gina Rinehart’s Roy Hill project, which starts exporting from Western Australia’s Pilbara region this month.
ANZ head of commodities research Mark Pervan said Chinese steel exports sank last month, which could add pressure to iron ore prices.
“Unwanted Chinese steel exports and still sticky high domestic steel production means too much Chinese steel supply, which in turn will mean lower Chinese steel ­prices and ultimately lower iron ore prices,” Mr Pervan said.
The surge in oil and gas stocks, just after Origin Energy at the end of September finally yielded to pressure to raise $2.5bn of equity, has been driven by a boost in Brent oil prices, which last traded on Friday at $US52.82 a barrel, up more than 9 per cent for the week.
Oil is rising on expectations of an improvement in global demand, along with signs that US shale production is finally slowing. But there are concerns around the potential for increased exports from Iran, which may keep a lid on price gains.
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#42
Now's the time to invest in commodities and emerging markets, says Morgan Stanley
DateOctober 14, 2015 - 4:26PM
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Vanessa Desloires
Reporter

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Morgan Stanley has reversed its long-held bearish view on emerging markets. Photo: Reuters

Morgan Stanley has turned contrarian investor on emerging markets, saying now is the time to buy emerging market and commodity-exposed stocks and currencies while anticipating a sharemarket bounce to finish the year.
The US-based investment bank's global strategy team doesn't share market concerns that emerging markets, led chiefly by China, would send the developed world spiralling into a recession. 
"We believe [global economic] expansion is still in tact, with strong consumer trends in developed markets helping to offset the drag of [emerging markets] growth," Morgan Stanley said in its updated Autumn Outlook paper.
"This is one reason why we think investors should approach recent weakness as a bull-market correction, rather than a more ominous turning point."
The 15 per cent pullback in global equities between May and September was consistent with average corrections since 1998, they added.
Despite the market remaining volatile, Morgan Stanley advised investors to "keep the faith", anticipating a strong bounce in equities to finish the year. 
Adding to Morgan Stanley's optimism was that monetary and fiscal policy in emerging markets remained accommodative, while commodity prices and China's currency seem to have stabilised. 
"Economic activity is showing signs of stabilisation, particularly in manufacturing and China's housing markets," strategists James Lord and Hans Redeker said. 
"This should help capital flows to normalise, reducing the need for currency intervention to maintain stability" of the Chinese yuan.
That would both reduce the need for China to make another snap devaluation from its peg to the US dollar, the first of which took place on August 11, sending markets into a shock sell-off. But China's monetary policy could become more effective. 
Bullish bear
Meanwhile, recent commodity prices including iron ore, copper and crude oil were encouraging as they remained broadly unchanged since July 31, indicating there had not been a sharp decline in demand in the past two months, the strategists said.
The note marked a significant change from Morgan Stanley's previously bearish view on emerging markets. The bank has started strategically buying into emerging markets currencies, in particular the Mexican peso and Indian rupee, which it said were underpinned by "strong fundamental stories".
But Mr Lord and Mr Redeker warned the long-term view for emerging markets remained "challenging" due to a lack of growth prospects, and high debt levels.
In equities, exposure in emerging markets should be through companies from developed markets that have exposure to those economies, the report recommended. 
Morgan Stanley favours European and Japanese stocks, which it says are inexpensive and have supportive monetary policy.
"We recommend investors raise their exposure to [emerging markets]/commodities given the combination of very low sentiment, attractive relative valuations and a likely inflection in macro sentiment," European strategist Graham Secker said. 
But expectations of a rise in commodity prices in line with historical interest rate rises by the US Federal Reserve are misplaced, as the global environment was vastly different this time, Pimco commodities portfolio manager Nicholas Johnson warned. 
"The Fed isn't increasing rates today to slow growth or slow inflation, rather they're raising rates to normalise policy. You're likely to not see the same increases in commodity prices," he said. 
Adding to that, most commodity markets were dealing with large inventory overhangs, and divergent monetary policies mean a strengthening US dollar will keep pressure on prices.
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#43
  • Oct 17 2015 at 12:15 AM 
How to profit when agribusiness booms
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[img=620x0]http://www.afr.com/content/dam/images/g/k/8/7/0/i/image.related.afrArticleLead.620x350.gk6qtu.png/1444971614448.jpg[/img]Fat Prophets' Angus Geddes is bullish on a small group of Australian agribusiness stocks. Rob Homer
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by Tony Featherstone

With demand for food set to soar as the world population reaches almost 10 billion by 2050, these five strategies will help you gain exposure to food stocks and commodities.
1. AGRIBUSINESS MANAGED FUNDS
Only a few Australian funds specialise in global agribusiness. The Colonial First State Global Soft Commodity Share Fund has returned 14.5 per cent annually over three years and the Ironbark GTP Global Equity Agribusiness Fund, managed by Global Thematic Partners, has a 6 per cent annualised return over five years.
Deutsche Bank's DWS Global Agribusiness Fund is another option. 3F Asset Management's Food and Fibre Fund is an interesting new choice for investors seeking exposure to agriculture-related supply chain businesses.

2. GLOBAL AGRIBUSINESS SHARES
Several themes dominate global agribusiness funds. Colonial's Global Soft Commodity Share Fund favours grain-handling stocks with a global footprint, such as Archer Daniels Midland. "We like the supply chain space in agribusiness and firms that shift commodities around the globe," says Colonial's Mario Maia. "Almost perfect crop-growing conditions in the past two years have created a lot of grain inventory that needs to be moved."
Protein producers in emerging markets are another preferred theme. "The devaluation of the Brazilian real has made that country's agribusiness sector ultra-competitive," Maia says. "China has approved the importation of Brazilian beef and we expect Brazilian companies to increase agribusiness exports across a range of proteins." Maia says Minerva Foods, listed on the Sao Paulo Stock Exchange, is an example.
About a fifth of the Colonial fund is invested in fertiliser stocks. Key holdings include Syngenta AG, Monsanto Company (its takeover bid for Syngenta failed last month), Archer Daniels Midland and Potash Corporation of Saskatchewan.


Global Thematic Partners' Ralf Oberbannscheidt likes fertiliser companies and agribusiness supply chain managers. "The market is underestimating the value of companies that can ship surplus wheat from North America to Europe or elsewhere. These are difficult assets to replicate." Archer Daniels Midland, giant US agribusiness provider Bunge and GrainCorp are examples.
The Global Thematic Partners' Agribusiness Fund's 10 top holdings are: Agrium, Potash Corporation of Saskatchewan, Mosaic Company, CF Industries Holdings, KWS SAAT, Vilmorin, Monsanto, Syngenta, The Andersons and Bunge.
3. AUSTRALIAN AGRIBUSINESS SHARES
Fat Prophets chief investment officer Angus Geddes✓ is bullish on a small group of Australian agribusiness stocks. "We have a very favourable view on the sector," he says. "The long-term thematic of a rising global population needing more food, and Australia's capacity to supply more of it, is compelling. Short term, we expect further falls in the Australia dollar to boost competitiveness, and for sector restructuring to produce faster revenue growth."

Geddes prefers Nufarm and Elders. "Both have been through difficult, transformative corporate restructures, and [are] in a much stronger position today. We expect further gains as restructuring benefits are realised in the next few years."
Nufarm's profit result in September reinforces the agribusiness sector's potential to deliver faster revenue growth, Geddes says. He believes Nufarm could be a takeover target for its key shareholder, Japan's Sumitomo Chemical.
The fertiliser and explosives producer Incitec Pivot is another Geddes preferred stock. "Incitec has been through a capital intensive period as it brings on its Louisiana ammonia plant. As capital spending decreases, Incitec's free cash flow and dividend should increase, and it benefits from a lower Australian dollar. Also, investors who buy Incitec are getting exposure to the Dyno Nobel explosives businesses at the low point in the mining cycle."
4. EXCHANGE-TRADED FUNDS

A handful of ASX-quoted exchange-traded funds (ETFs) provide exposure to soft commodities. Key options include the BetaShares Agriculture ETF and ANZ ETF Securities funds over a basket of commodities or over corn, grains and wheat.
BetaShares' Agriculture ETF offers leverage to soybeans, corn, wheat and sugar, and is hedged against currency movements. It is technically a synthetic ETF because it uses derivative instruments to provide access to those commodities because physical storage is not possible.
BetaShares managing director Alex Vynokur says the Agriculture ETF's main benefits are portfolio diversification and an offset against rising inflation. "Soft commodities historically have a lower relationship to other asset classes, such as equities and bonds. As such, introducing soft commodities to a portfolio can potentially improve its risk-adjusted return. Also, they tend to shelter portfolios if inflation increases."
Vynokur says investors who want better portfolio risk diversification should allocate 5 per cent  to 10 per cent of a portfolio to agricultural and minerals commodities. "Australian investors, generally, have very low or no exposure to soft commodities, despite a large, growing middle class in China, and later in India, needing more food. Investors tend to group all commodities together, but soft commodities dance to a different tune compared to bulk or base metals or energy prices, and have held up better than other commodities this year."
The BetaShares Agriculture ETF has a one-year return of minus 18.5 per cent and has lost an annualised 18.7 per cent over three years. As a currency-hedged ETF, it has not benefited from the Australian dollar's fall. Contrarians could see the ETF's fall as a buying signal.
5. RURAL LAND
Gaining exposure to a diversified portfolio of Australian farmland, through a listed or unlisted fund, is becoming more popular.
Rural Funds Group, Australia's first listed agricultural property trust, owns poultry farms, almond orchards and viticulture. It buys farms and leases them, and its manager, Rural Funds Management, is one of Australia's oldest agricultural investors.
Unlike many Australian Real Estate Investment Trusts (AREITs) in this market, Rural Funds Group trades at a discount to its net asset value (NAV). Its $1.16 unit price compares to its adjusted NAV of $1.22 (which includes independent valuations of water entitlements), meaning it theoretically trades just below its asset backing.
Rural Funds Group in late August increased its distribution guidance for 2015-16 to 8.93¢ per unit, implying a 7.6 per cent yield. As a land owner, it is a lower-risk play on agribusiness compared to investing in farm producers or soft commodities.
"A listed property trust over farmland is, in our opinion, the least volatile way to invest in the farm sector," says Rural Funds Management CEO David Bryant. "We are not subject to the same operating risks as a farmer, and benefit from steady growth in farmland values over time, and from rising rental income from indexation and other reviews."
Bryant says Rural Fund's core commodities of almonds, poultry and viticulture have good prospects. "Big sections of the Australian agriculture sector are making good profits, in part because of our falling dollar. Look at the returns Select Harvest has achieved in almonds, or by cotton growers in South Australia, or beef and lamb producers. But things can change quickly in agriculture, which is why you should invest through diversified funds."
FarmInvest Australia chairman Steve Burt also favours a model of investing in farmland through a fund. FarmInvest in February launched the $500 million wholesale Australian Farmland Investment Fund to invest in local agricultural land. The unlisted fund closes in June 2016. FarmInvest's directors manage farms worth $43 million and have achieved a 7.3 per cent annual return over 10 years, net of fees.
FarmInvest wants to buy large and small farms, and lease them back to farmers. "We've seen similar models in Canada, where managed funds invest in farms in different regions, and across different commodities, to reduce risk," Burt says. "We expect to see greater consolidation of Australian farmland in the coming decade and believe this trend provides a steady, attractive opportunity for long-term investors who seek a combination of steady yield and exposure to capital growth opportunities, while aiding succession and capacity building for local farmers."
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#44
  • Oct 17 2015 at 12:15 AM 
Why you should bet on the farm
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[img=620x0]http://www.afr.com/content/dam/images/g/k/1/2/i/1/image.related.afrArticleLead.620x350.gk6q9i.png/1444971542986.jpg[/img]Food demand will soar as the world population explodes. But arable land is shrinking. Peter Braig
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by Tony Featherstone

The long-term opportunity in agribusiness is undeniable. Food demand will soar as the world population reaches an estimated 9.7 billion by 2050 and as a new generation of middle-class Asian consumers upgrades their diets.
An extra 70 million people each year will need to be fed. But arable land is shrinking because of population growth, urbanisation and rising desertification. Acute water shortages and higher climate volatility in coming decades are other threats.
Global Thematic Partners, one of the world's largest investors in listed agribusiness companies, estimates up to $100 billion annually has been underinvested in the global food chain since the 2008-09 global financial crisis.
Trillions of dollars will be needed to upgrade food-storage facilities, transport infrastructure and improve farm productivity in developing nations. Moving surplus food around the globe, quickly and cheaply, will be critical if extreme weather events are more frequent.
[img=620x0]http://www.afr.com/content/dam/images/g/k/b/5/9/4/image.imgtype.afrArticleInline.620x0.png/1444971410722.jpg[/img]Illustration: Simon Letch
"The world hasn't even come close to solving the global food puzzle," says Ralf Oberbannscheidt, a founding partner of Global Thematic Partners and the leader of its agribusiness strategy. "Global food stockpiles would last about two months if production stopped, and that has barely increased in the past nine years. The world has bigger stockpiles of iron ore, copper and iPads than it does of food."
Oberbannscheidt says opportunities are being missed. "We've seen fatigue in global agribusiness-investing because people are focused on slowing economic growth, emerging-market volatility and falling commodity prices. It is when investors overlook fundamental themes – in this case, rising food demand – that money is usually left on the table for others. At a micro level, agribusiness is undergoing a great revival."
This is already happening in Australia. Several ASX-listed agribusiness stocks have rallied this year and others are catching up. Tasmanian organic food supplier Bellamy's Australia has soared sevenfold from a $1 issue price in its August 2014 sharemarket float. Capilano Honey, a 2012 float, has returned 236 per cent over one year, and Select Harvests, Ridley Corporation, Elders and Farm Pride Foods have delivered strong gains.
Crop-protection supplier Nufarm last month reported better-than-expected earnings and a 60 per cent total return over one year. Operational restructures in Nufarm, Elders and other agribusiness companies are paying off, with many agribusiness stocks outperforming the sharemarket this year.
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Revenue growth of agribusiness stocks stands out in a sharemarket where companies are struggling to lift sales. Our falling currency is boosting agriculture exports and Australia's reputation as a reliable, quality food supplier to Asia is finally resonating with investors.
Free-trade agreements with Japan and South Korea – and China, if passed in the Senate – will boost agricultural exports. The Trans-Pacific Partnership agreement, reached this month, will lift our livestock sector's global competitiveness. However, trade deals usually take years before they affect corporate earnings and share prices.
Agribusiness initial public offerings (IPOs) are also featuring. MG Unit Trust, which provides exposure to the Murray Goulburn dairy co-operative, raised $439 million; Australia's largest fruit and vegetable producer, Costa Group Holdings, raised $550 million. Both listed in July. Beston Global Foods Company raised $100 million and listed in August, and the Chinese agribusiness Dongfang Modern Agriculture Holding Group is seeking $50 million for an IPO. Agribusiness companies have raised about a fifth of capital in the IPO market this year.
But Australian investors have mostly missed out on the action.
[img=620x0]http://www.afr.com/content/dam/images/g/k/8/3/k/0/image.imgtype.afrArticleInline.620x0.png/1444717633356.jpg[/img]Colonial First State's Renzo Casarotto says global agribusiness has delivered consistent, strong growth. Lisa Maree Williams
Only 0.3 per cent of the $364 billion invested through MySuper is exposed to agribusiness, according to a report by accountancy firm BDO. A lack of large investable opportunities has created a disconnect between Australia's $2 trillion super sector and an agriculture industry worth 12 per cent of the economy.
Australian fund managers are just starting to target agribusiness. Most institutional capital in the past few years has come from international funds or companies that have seen more potential in our agriculture sector than internationally.
The $53 billion First State Super fund made its first agriculture investment in August, paying more than $150 million for almond plantations owned by Select Harvests. Other super funds are expected to follow.
First State Super chief investment officer Richard Brandweiner says the agribusiness investment can deliver attractive long-term returns and meet the fund's broader social objectives to deploy capital responsibly.

"A lot of capital in the world is chasing very few assets," Brandweiner says. "Quantitative easing has pushed up the prices of risk assets globally and we are not seeing much value in US equities, commercial property, infrastructure or fixed income. Super funds have to look closer at sectors that have been neglected, such as agribusiness.
"We look for situations where the supply and demand dynamic for capital works in our favour. The Australian agriculture sector has been underinvested for a long time. That creates better opportunities for those who can supply that capital."
Retail investors, too, have mostly overlooked agribusiness. The collapse in 2009 of agriculture tax-minimisation schemes Timbercorp and Great Southern plantations cast a shadow over listed agriculture stocks.
The combined value of specialist ASX-listed agriculture stocks is about a tenth the size of Commonwealth Bank, and many are small- or micro caps stocks that suit speculators. There have not been enough large agribusiness stocks, specialist managed funds or agribusiness-focused advisers for long-term investors.
Further, local agriculture stocks have typically been in riskier upstream farm production, although this is changing as downstream companies that add value to food products emerge. The result: investors need to look across the global food chain for opportunity.
Colonial First State senior portfolio manager Renzo Casarotto says the global agribusiness sector has delivered consistent, strong growth. He co-manages the Colonial First State Global Soft Commodity Share Fund, the best performer of its type in Australia.
He says the DAXglobal Agribusiness Index, a key barometer of global agriculture stocks, delivered compound annual earnings and dividends-per-share growth of 10.7 per cent and 15 per cent respectively over the decade to June 30, 2015.
"That's better than the ASX 200 Index, MSCI Emerging Markets Index and the MSCI World Index," Casarotto says. "Despite this long-term earnings growth outperformance, global agriculture stocks collectively trade at a discount to MSCI World Index, because they are perceived as being more volatile and reliant on soft commodity prices as a driver of earnings."
Casarotto says investing across global agriculture provides exposure to a range of companies, from those providing farm inputs such as fertilisers to basic food producers and manufacturers, specialist transport companies and food manufacturers.
"Parts of the global agriculture value chain are very correlated to soft commodity prices," Casarotto says. "But across the whole chain, the earnings of global agribusiness companies, in aggregate, are not as influenced by commodity prices as investors may think."
Agribusiness investing also has diversification benefits, says Mario Maia, who co-manages the Colonial soft commodity fund. "Global economic growth has less influence on agribusiness than on sectors that rely on capital investments. Food consumption tends to be very defensive, underpinning growth in the agribusiness chain even when economic activity is slower. Agribusiness is more of a play on global population growth and food consumption trends than global economic growth."
Maia says investors can spread risk by exposing portfolios to a mix of companies in different commodities and geographies. "Weather events and geopolitical risks can be significant and hard to predict. By having exposure to various companies across crops, markets and countries, risks can be greatly mitigated."
The duration of agribusiness investing is another consideration. Those buying agriculture producers that have high leverage to soft commodity prices need to trade them in and out of cycles, much like resource stocks. They are not set-and-forget investments.
The short-term outlook is challenging. Business forecaster IBISWorld predicts annual revenue growth of 1.2 per cent in Australian agribusiness between 2016 and 2021. Rainfall is expected to decline in the next two years as El Niño conditions return to eastern Australia.
Soft commodity prices could fall further if Chinese demand weakens. The S&P GSCI Agriculture Index, a benchmark for agricultural commodity markets, has fallen 9 per cent over one year and lost an annualised 16 per cent over three. The lower Australian dollar has cushioned soft commodity price falls for local producers and within agribusiness there have been strongly performing crops, such as almonds.
But finding a catalyst in the next 18 months to re-rate soft commodities is hard. The Macquarie Agriculture Commodity Price Index had a bearish rating. "We struggle to find any strong indicators across agri markets," wrote Macquarie in September. "Unless there is a major weather event across the major producing regions, the path of least resistance looks to be further downside …"
Short-term investors need to take care. The prospect of further falls in soft commodity prices, persistent sharemarket volatility and higher valuations for some Australian agribusiness stocks are threats. Also, there is a risk of too much new supply in some commodities as producers gear up for rising Asian demand. Falling milk prices in the past year are an example.
Nevertheless, long-term investors could find that weakness in soft commodity prices provides a better entry point to buy into this trend.
Agribusiness has great macro potential. Another 3.1 billion middle-class Asian consumers by 2030, on OECD forecasts, will drive higher demand for beef, lamb, pork and other proteins.
It's at the supply chain level where the real gains lie. A recent OECD report on Australian agriculture said a decade-long decline in the sector's productivity growth, partly due to difficult climatic conditions, must be overcome if Australia is to maximise its export potential in food.
As superannuation funds show more interest in agribusiness, larger investment opportunities will emerge and greater private capital will flow into the sector. In time, this should drive sector consolidation, encourage private agribusiness companies to list on the ASX, and provide capital for those firms to innovate and lift productivity, as the OECD suggests.
Other agribusiness themes will create value. Storers and distributors of food production, for example Graincorp, are ideally positioned to participate in the so-called "dining boom". Transport and logistics companies will benefit. Japan Post's takeover of Toll Holdings this year and Brookfield Infrastructure's bid for rail and ports operator Asciano are part of a trend to better integrate logistics chains in the Asia-Pacific region.
Technology is another opportunity, Oberbannscheidt says. Farmers could one day sell information on crops to seed companies and build new revenue streams from "big data". More farms could use aerial drones to monitor crops and herds, and software algorithms to analyse data and maximise production. Libraries of genetic crop and pest information will be needed in Asia to better understand plantations. 
Social trends will drive change. Oberbannscheidt says the move towards organic food, changing food tastes (such as a campaign against sugar) and higher private-label food sales (witness Aldi's growth in Australia) will create winners and losers. 
Growth of emerging-market food brands that compete aggressively with Western multinationals, higher consumption in Asia of soft drinks, tea, energy drinks and alcohol, and the use of food as personalised medicine, are other opportunities. 
"The world has 850 million undernourished people and that has been the case for 40 years," Oberbannscheidt says. "Food security will become a bigger issue this decade and next, and inevitably lead to conflicts. Crops will have to become more productive, greater investment in crop-protection technologies and fertilisers will be needed, supply chains will need to improve, and financial systems that accommodate agribusiness investment and commodity price hedging will have to be built in Asia. An incredible amount of investment is required."
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#45
Chinese copper-trading surge shakes up market
  • TATYANA SHUMSKY
  • THE WALL STREET JOURNAL
  • OCTOBER 19, 2015 6:56AM


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Workers processing copper at BHP’s Olympic Dam copper, gold and uranium mine. Source: Supplied
[b]Chinese investors hamstrung by stock-trading restrictions are piling into copper trading, a shift that analysts and traders say has distorted the global market for the metal.[/b]
Since the start of July, when authorities began limiting stock trading in China, trading in stock-index futures has fallen 97 per cent to around 65,000 contracts a day, while trading in Chinese copper futures has nearly doubled to roughly 710,000 contracts a day. Because investors now face obstacles in betting against stock futures, they have turned to the copper market as they seek avenues to bet on a deepening slowdown in the world’s second-largest economy, traders and other market experts say.
Spikes in activity on China’s main commodities exchange have coincided with a period of heightened volatility in copper prices and are driving copper-trading volumes worldwide. Global volumes are on track to hit a record high this year, with traders in China accounting for the largest share.
The rising prominence of Chinese investors in the copper market is the latest example of the country’s increased heft in financial markets. In recent years, Chinese investors who used physical metals as collateral for bank loans were credited with driving up demand for copper, zinc and nickel and contributing to higher global prices. Now, some industry officials have said the heavy selling of copper futures in China has skewed prices so much that they no longer accurately reflect the supply and demand for a metal used in everything from iPhones to refrigerators.
“We saw copper being sold heavily (by Chinese traders) when trading was first being restricted in Chinese equities; it was an outlet to be able to sell risk,” said David Donora, who oversees $US600 million invested in commodities at Columbia Threadneedle Investments. “If you stop the trading in one part of the market and there’s a proxy for offloading that risk elsewhere, you’ll use that proxy.”
China’s main stock gauge, the Shanghai Composite Index, tumbled 43 per cent between June and late August as investors fled on fears the domestic economy was losing steam. Authorities devalued the yuan to ease domestic business conditions, while also curbing stock trading and coordinating a stock-buying effort by state-owned enterprises to stabilise the stock market. The combined measures have helped lift the Shanghai Composite 15 per cent from its August low.
The surge in Chinese copper trading came as market regulators there made it harder to borrow money for trading stocks in an effort to stem the market’s fall, and increased the minimum deposits necessary for trading. Chinese investors have often had to cut back share dealing during the market’s tumble, either because companies have suspended trading in their shares, or because prices of many individual stocks have fallen by their daily 10 per cent limit.
Copper-trading volumes in China have often spiked after fresh regulatory measures were introduced. On September 2, when the China Financial Futures Exchange announced it would require speculators in stock-index futures to deposit 40 per cent of the contract’s value, up from 30 per cent, Chinese stock-futures volumes collapsed from more than a million contracts a day to tens of thousands in the days that followed. Copper-futures volumes surged from less than 300,000 contracts on September 7 to 1.3 million on September 9.
Xiao Chaojiang, who manages roughly 30 million yuan ($US4.7 million) at Shenzhen-based Jiangcheng Investment Co., said he pulled roughly 10 million yuan out of stock-index futures after the September crackdown. Instead, he placed bearish bets on copper and zinc prices, which he expects to fall as China’s demand for industrial metals wanes.
Copper prices hit a six-year low in late August, at the peak of China’s stock sell-off, and neared those levels again in September as more Chinese investors switched to trading commodities. Copper futures ended on Friday at $US2.407 a pound on the Comex division of the New York Mercantile Exchange, down 15 per cent this year.
On the other side are multinational metal traders that are able to profit from the recent swings. When metal prices in London are more expensive than in Shanghai, these traders buy copper where it is cheaper and sell it where it is more expensive, making a profit on the difference. Copper price volatility, measured by averaged price swings, rose 40 per cent in September compared with the start of 2015, according to Mitsui Bussan Commodities.
From a trading floor in lower Manhattan, Hang Shi, a metals trader for Northport Commodities, a hedge fund, monitors futures prices on the Shanghai Futures Exchange on one of her six computer screens.
Ms Shi’s mornings are busy because many Chinese traders stay up late — trading from 9pm to 2am Shanghai time — to take advantage of the greater liquidity available when New York and London are open.
“I will join the market for a few minutes,” Ms Shi said. Once the gap between the two markets shrinks, Ms Shi exits the position, ideally locking in a profit. “What we do is generate a lot of trades, each one with a very small profit, but our volume is very big,” she said.
August and September were two of Northport’s best months in copper, according to managing director William Purpura.
As the increased activity in China ripples through London and New York, trading volumes worldwide are rising.
So far this year, the equivalent of 637 million metric tons of copper has changed hands among the world’s copper futures traders, according to data from Macquarie tracking the most-actively traded contracts in Shanghai, London and New York. This is a record high for the period and on pace to exceed the full-year record high of 737 million tonnes notched in 2014.
Shanghai accounted for 47 per cent of these volumes.
Even with an active market, some market participants say the selling by Chinese investors has suppressed the copper price. Copper-mine supply lagged behind demand in recent years and inventories of the metal are dangerously low; stocks at the three main exchanges currently cover less than a week of global demand.
“It’s just not making sense. We’ve never seen copper inventories down at these levels and prices, because these levels, you normally have a much higher copper price,” said Ivan Glasenberg, chief executive of Glencore, during the company’s earnings call on August 19.
Copper’s sell-off has been particularly painful for Glencore, which got 20 per cent of its operating income from copper production in the first half of 2015. The broader commodities plunge in recent months has forced Glencore executives to shut down mines, sell stock and reassure investors that the company’s balance sheet remains solid.
Citigroup estimates that roughly 1.6 million tonnes of global copper production has been lost this year due to adverse weather, worker strikes and other disruptions.
“We believe there has been a clear (disconnect) in the recognition of reduced output growth versus copper prices,” said David Wilson, Citigroup’s metals analyst, who expects copper will rally to $US3.0391 a pound by the end of 2016.
Wall Street Journal
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#46
Two reasons commodities may have found a bottom

Adam Carr
[Image: adam_carr.png]
Chief Economist Eureka Report
Sydney


[b]While it’s unlikely that commodity prices will stage a material rebound, there is a good chance that a trough has been found. There are two reasons for this. Firstly, much of the shrinkage that regulators sought in the commodities market appears to have occurred. Secondly, it looks increasingly likely that the US dollar is at a peak.[/b]
Now this clearly carries significant ramifications for the Australian market. It’ll remove a key source of angst for investors and it should counter much of the pressure the Reserve Bank of Australia is under to cut rates again. That may sound counterintuitive as far as the US dollar goes, with most economists arguing that any renewed US dollar weakness strengthens the case for the RBA to cut. This isn’t necessarily the case though, as a weaker US dollar is normally associated with higher commodity prices.
Recall that the RBA isn’t, or wasn’t, seeking a weaker Australian dollar just for the fun of it. The RBA’s thinking was that a weaker currency would be needed to offset the impact of weaker commodity prices. Obviously if commodity prices aren’t going to weaken further, then that reduces the need for a weaker currency.
This is where the push by global policymakers to shrink the commodities market — and in particular trading by investment banks — comes in. This action has seen the notional value of over-the-counter (OTC) derivatives in the commodities market shrink from about $US13 trillion in 2008, to about $US1.8 trillion as at the end of 2014. The gross market value of outstanding derivative contracts (the cost of replacing outstanding contracts) is barely 14 per cent of the 2008 peak. That’s a substantial decline in market activity and a sizeable outflow of funds, which goes a long way in explaining why commodity prices have fallen so dramatically, especially in markets such as crude oil, where there is quite obviously no global glut. Like the peak oil hysteria of 2008, declarations of global crude glut don’t fit the evidence.
In any case, there are two good reasons to believe this process may be close to completion. Firstly, the OTC derivatives market is now at a similar size to what it was back in more ‘normal’ times. Like in 2004, just before the commodities upswing turned into a boom. A stronger signal perhaps is that the gross market value of derivative contracts rose in the second half of 2014, the first such increase since the GFC (over the year to December).
As for the US dollar, the price action certainly points to a peak. Following a surge from the latter half of 2014, the dollar index hasn’t done much for about six months now. It has effectively range traded since April.
Admittedly the direction of the currency is clouded by the US Federal Reserve’s rates outlook. Yet it’s becoming increasingly obvious that the Fed won’t hike rates in 2015 and investors are starting to question whether they’ll even go up in 2016. As it stands, market pricing for a hike doesn’t go above 50 per cent till March 2016. Bear in mind though that back in January of this year, the market attributed an 80 per cent chance of a hike by Christmas. That’s dropped to 32 per cent now. Moreover, there is little to suggest that this pattern of continually pushing back the timing of the first hike is over. It’s been going on for the last five years.
Not that the Fed will want to see the US dollar weaken too much either. Ultimately, it’s a balancing act. The Fed won’t want the currency to strengthen too much, and there is already a lot of opposition to its current level. Yet neither does the Fed want to lose the restrictive influence a stronger currency provides at this point. It means they don’t have to hike, which is why policymakers appear quite content to allow the US dollar to do some of the work.
Admittedly the market still holds a net long position on the US dollar index, according to CFTC data. Having said that, this position is the weakest it’s been all year and the number of short positions are half what they were at the 2015 peak. Not a clear signal that the US dollar will weaken or anything, certainly, but conviction on long positions is clearly waning.
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#47
Why miners keep expanding as prices collapse
  • PAUL KIERNAN, RHIANNON HOYLE
  • DOW JONES
  • OCTOBER 23, 2015 7:54AM


[Image: 441898-6ccf88cc-7909-11e5-8a65-6b39ea9ff19d.jpg]
Rio Tinto says currency shifts will save the mining giant a little over $US300 million this year. Source: Supplied
[b]Even as iron ore prices have collapsed, Brazilian giant Vale SA is building a $US16 billion iron-ore operation that it touts as “the biggest project in our history and in international mining.”[/b]
How? Because its costs are collapsing as well.
From South America to Australia, plunging currencies in mineral-rich nations are helping some companies expand their mines — and contributing to a glut of production that has saturated markets and driven prices down.
The cost of producing many commodities is “dropping like a stone,” said Goldman Sachs’s head of commodities research, Jeff Currie, who describes it as a “negative feedback” loop. The dynamic helps explain why commodity busts can be so long-lived.
The hope for recovery in commodities markets rests with the prospect that producers will run out of money or tire of losses and shut their facilities, bringing supply back into balance with weakened demand.
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But for the world’s top miners, which operate mostly outside the US, currency declines have dulled the pain of lower commodity prices. Over the last year, The dollar has gained 58 per cent against the Brazilian real, 22 per cent against the South African rand, 21 per cent against the Australian dollar and 16 per cent against the Canadian dollar.
Companies receive US dollars for the gold, iron ore and coal they dig up. But they pay wages, electricity and many other expenses in local currency.
With the sharp drop in the value of the real, Vale is on track to become the lowest-cost producer of iron ore in the world, Credit Suisse said last month. The Brazilian company said overnight (AEDT) that its net loss widened by 47 per cent to $US2.12 billion for the third quarter — the result of a drop in the price of the iron ore it sells and accounting losses triggered by the falling currency.
But the weaker currency sent Vale’s costs sharply lower, too, particularly in iron ore. Including expenses such as freight and royalties, Vale said it could deliver iron ore to China, its main market, at a total cost of $US34.20 per tonne in the third quarter, down from $US58.50 a year earlier.
That more than offset the decline in prices. Vale sold its iron ore for an average price of $US46.48 per tonne in the third quarter, down from $US68.02 a year earlier.
In a separate report on Monday, Vale said it dug up 88.2 million tonnes of iron ore in the July-September period, its highest quarterly production ever. With 75 per cent of its capital expenditures denominated in Brazilian reals, Vale has little incentive to slow down spending on projects that executives say will make its mines more competitive.
Analysts say the weaker real should help Vale compete better with Australian rivals such as Rio Tinto and BHP Billiton that are closer to China.
“Certainly Vale have had a tremendous benefit from the devaluation in the currency,” said Nev Power, chief executive of Australian miner Fortescue Metals Group, the world’s No. 4 exporter of iron ore, after Vale, Rio Tinto and BHP.
Costs are falling for those competitors, too. Rio Tinto technology and innovation executive Greg Lilleyman says shifts in the currencies of Canada and Australia should help the company save a little over $US300 million this year on group-wide investments. BHP Billiton says the weaker Aussie dollar helped reduce production costs by nearly a third at its iron-ore operations in the country.
Atlas Iron said earlier this year it would suspend the three mines it runs in Western Australia’s iron-rich Pilbara region. But the shutdown was brief. The sliding Aussie dollar eased pressure on the miner as it worked with contractors to cut costs and raised cash to keep the business on its feet.
Despite production cutbacks by higher-cost mining companies, UBS metals and mining analyst Andreas Bokkenheuser forecasts the iron-ore market will be oversupplied by a 150 million tonnes by 2018, as producers such as Vale and Anglo American ramp up flagship projects.
Australian mining magnate Gina Rinehart’s Roy Hill mine, slated to start up this month, should add 55 million tonnes of iron ore a year to the market by late 2016. This “impending whale” could help push prices below $US40 per tonne early next year, according to Citigroup Global Markets, further pressuring companies’ margins.
Australia’s output of iron ore surged 14 per cent in the year through June, according to government estimates.
Weaker currencies are helping keep the floodlights on at coal mines as well, despite a global glut of the fuel that has pushed down prices as much as 80 per cent in recent years.
Australia’s coal output rose 6 per cent in the first six months of 2015, government figures show.
Wood Mackenzie estimates that Australia’s average cost of producing coal has fallen 30 per cent since 2013. The consultancy puts more than half that improvement down to the weaker currency.
“Coal prices have not fallen by much in exporting countries” when converted into local currencies, Capital Economics economist Thomas Pugh said in a note. “This has allowed producers in these countries to maintain supply, and even increase it in some cases.”
The effect is felt in other materials as well.
South Africa-based gold miner Gold Fields Ltd, which has operations in South Africa, Ghana, Peru and Australia, said its cash costs fell 3.1 per cent in the second quarter from a year earlier to $US1,059 an ounce.
“The exchange rate bailed us out,” Chief Financial Officer Paul Schmidt said.
Dow Jones
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#48
AMCI says mining bargains remain elusive due to commodity price recovery hopes
DateOctober 26, 2015 - 8:45AM
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Perry Williams
Senior Reporter



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AMCI's Nicole Hollows is confident commodity prices will rebound in the next few years. Photo: Louise Kennerley

AMCI, the private-equity giant run by German billionaire Hans Mende, said mining companies are being oversold while cautioning that bargain deals may remain elusive as potential sellers cling to hope that coal and metal prices recover in the next few years.
Nicole Hollows was appointed AMCI chief executive for Australia and south-east Asia in February 2014 but has kept a low profile since, scouring the market for possible acquisitions.
Ms Hollows, the former managing director of Gloucester Coal, admitted being surprised by the prolonged price plunge in commodities and said resources companies across the board had been oversold.
"I think the market is overreacting on all the commodities," she said. "We had an extraordinary boom but this bust is going a long time and it's probably gone a lot longer than most people thought. But I think some of the equity price movements have been overdone."
AMCI has an estimated $2 billion invested in natural resources assets globally, with its Australian holdings including a substantial stake in Whitehaven Coal along with a holding in the Aurizon-led West Pilbara iron ore project. 
AMCI was courting investors in the United States and Asia last year to raise up to $800 million for a new mining fund,with a large chunk of the raising earmarked for Australian acquisitions,

However, Ms Hollows said the fund had been postponed due to the continued slump in mining markets.

"We were looking at raising a fund but we decided to look at other opportunities and potentially co-invest options," she said. "It's just difficult times with the market continuing to stay down."
It was tipped the AMCI fund would have a heavy focus on gold and copper, with Mr Mende possibly anchoring the fund by taking a stake of about 20 per cent.
Ms Hollows said AMCI was actively canvassing the market for deals but noted there were fewer forced sales than some had expected, as producers wait for an uptick in commodity prices.
"I think you're not seeing many purchases from anybody: the Japanese, Indians and Chinese are just not as active. I think part of that is because a lot of people who were active spent a lot of money and the market has come down," she said. "So there are a lot of losses or potential impairment issues and people are trying to keep their head above water in survival mode until the market comes back again."
In terms of AMCI's direct investments, Ms Hollows remains confident about the development of the $7.4 billion Pilbara iron ore project, which faces a final investment decision in 2016.
Aurizon needs to give its partners, including AMCI, indicative port and rail tariffs by the end of November, and will hold meetings with its partners in December to decide whether to continue with the project's feasibility studies.
"We are not in a holding pattern. That project is going through an updated feasibility study," she said. "Obviously, the iron ore price has made it tougher for everybody so it means we've got to get the costs down for that project so we can make it economic."
Plunging demand from Chinese steelmakers for raw materials since 2011 has led to falling prices for the two key ingredients needed to make steel: iron ore and coking coal.
Iron ore is on course for its third consecutive year of losses, trading at just $US51 ($70.50) a tonne on Friday compared with a 2011 peak of $US185 a tonne.
Prices for coking coal have dropped 75 per cent from a record $US330 a tonne in the past four years to just $US79 a tonne. Meanwhile thermal coal, Australia's third-biggest mineral export, is at an eight-year low of $US58 a tonne.
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#49
Turbo charged high risks ventures coming... caveat emptor...

Mining executives turn to crowd funding for junior miners

Paul Garvey
[Image: paul_garvey.png]
Resources Reporter
Perth


[Image: 157541-ca302d34-804b-11e5-8564-edf5e4809b26.jpg]
IThe practice of crowd-funding is worth about $7bn worldwide. Source: Supplied
[b]At a time when Australia’s junior exploration sector is starved of cash, two mining executives ­believe they have found a very modern solution: crowd-­funding.[/b]
Cameron McLean and Joe Treacy are looking to tap the growing phenomenon of crowd-funding and raise $500,000 for their new mining asset website, which they in turn hope to evolve into a platform to introduce crowd-funding into the resources sector.
The practice of crowd-funding, where ventures use the internet to raise capital through small commitments from a large number of people, is worth about $US5 billion ($7bn) worldwide.
Prohibitions under the Corporations Act limit the prospects for crowd-funding in Australia, but Mr McLean is hopeful that those restrictions will ease under the Turnbull government’s innovation agenda.
If and when that happens, Mr McLean and Mr Treacy plan to introduce crowd-funding as a means by which junior exploration companies could source seed capital.
Early-stage explorers typically tap networks of industry insiders and connections for their initial funding, with those entry-level investments often enjoying significant returns if those ventures ever make it to the Australian stock exchange.
Mr McLean told The Australian he hoped crowd-funding could eventually allow much smaller retail investors to tap into those early-stage seed-­investment opportunities that have historically only been the domain of the well-connected and deep-pocketed.
“With crowd-funding, if someone has got $500 and wants to get in at the ground floor of a mining asset, they can,” he said. “Typically, it’s only been open to people who with a nod and a wink and a handshake who knew that an asset had IPO potential and could get in at 7c or 8c in the knowledge it would IPO at 20c. Crowd-funding can open up the market completely.”
The move towards crowd-funding comes at a time when traditional methods of raising capital for early-stage exploration ventures have dried up. There have only been a handful of new resources IPOs on the ASX this year, and the smallest listed explorers are struggling to raise fresh equity to keep their activities going.
Mr McLean noted that those companies that were able to raise money through conventional means were often paying a high price to do so. “The resources sector at the moment is finding it really difficult to raise funds at the moment through traditional methods, and a lot of people are paying through the nose,” he said. “This will give companies an alternative means of raising capital.”
Mr McLean and Mr Treacy — both former executives of now defunct zinc miner Kagara — are themselves using crowd-funding to get their mining asset website off the ground.
The site, Mineral Intelligence, will allow anyone to list their for-sale mining projects free of charge in the hope of connecting with subscriber companies that will pay $US5000 a year to access the database.
Mr McLean and Mr Treacy are using Sydney-based crowd-funding provider Equitise and their New Zealand-based platform for Mining Intelligence’s raising.
Eventually, Mr McLean hopes to see Mining Intelligence evolve into a hub for crowd-funding in the resources sector.
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#50
El Nino leaves bitter taste as cocoa prices bite
DateNovember 3, 2015 - 8:07PM
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Stephen Cauchi
Business reporter

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Demand for chocolate rising as the shift towards darker chocolate and Asian appetite increases.

Here's some bad news for chocolate lovers: cocoa is the most expensive commodity, at least relative to recent history. 
Figures from Deutsche Bank, which ranked the prices of 20 commodities in comparison to their 2000-2014 average price, shows cocoa is 34 per cent more expensive this year compared to its long-term average price.
That was more expensive than gold (23 per cent more expensive this year), palladium (22 per cent more expensive) and tin (6 per cent more expensive). Lead cost as much this year as its long-term average price.
The other 15 commodities were cheaper than their long-term average price. Oil was 35 per cent cheaper and US natural gas 60 per cent cheaper.
There are long-term issues with cocoa production, but the short-term problems this year – which have cut supply and boosted prices – revolve around dry weather associated with the El Nino phenomenon.
Cacao trees, which produce cocoa, grow in countries near the equator. African countries like Ivory Coast, Ghana, Nigeria and Cameroon are big producers, accounting for 70 per cent of the world's output. Indonesia is the world's third-largest supplier. South and Central American countries like Peru, Brazil and Mexico are also major producers. 
Unfortunately, the dry weather affected the health of the trees and, therefore, this year's crop, a recent edition of MarketWatch said.
The world's largest cocoa producer, Ivory Coast, was expected to be down 100,000 tonnes from last years 1.72 million tonne harvest, it said.
The harvest begins in September-October and continues into the first quarter of next year.
And the news was no better in Indonesia.
Bloomberg reports that "cocoa production in Indonesia will probably plunge to a record low this year as an El Nino-linked dry spell may parch crops in the world's third-largest grower".
Indonesia Coca Association chairman Zulhefi Sikumberg said farmers might reap 70 per cent fewer beans in the September to December harvest compared with 2014 if El Nino strengthened.

However, ultimately, what does all this mean for the Australian consumer and the price of their favourite block of chocolate?
Professor David Guest, from the University of Sydney's Department of Plant and Food Sciences,told the ABC this year that prices would begin to lift about 2018 and could eventually double.
"We're OK for the next year or two, but after that as the demand for beans goes up, most of the chocolate companies are predicting we'll be about a million tonnes of beans short of demand by 2020," he said.
"You'll be expecting to pay twice the price if we're looking at 2020."
Political and social upheaval in West Africa was causing long-term supply problems for the crop, he said.
Meanwhile, in Indonesia, farmers were turning to more profitable coffee and maize crops. 
Demand factors were another firm support for cocoa prices, he said.
In China and India, chocolate consumption – about 50 grams a year per person compared with six or seven kilograms in Australia – was set to boom.
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