Global Wheat Supply Threatened by Weather

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The worst drought in 130 years has destroyed at least a fifth of the current Russian wheat crop and threatens much bigger damage to the winter wheat crop if the weather doesn't change soon. Only a bumper crop in the U.S. has prevented wheat prices from really going through the roof.

Russia is generally the fourth largest wheat producer in the world. Along with the former USSR member states of the Ukraine and Kazakhstan, it would be a close second to top producer China. Unfortunately, the Ukraine and Kazakhstan are also affected by drought. Ironically, the world's second largest wheat exporter, Canada, had the opposite problem of excessive rains this year and the wheat crop there is expected to be 35% below normal.  

Investors shouldn't confuse production and exports for food commodities. China and India are usually the two largest producers of wheat, but because of their huge populations, they can also be importers as well. It is the United States, the third largest producer, that is the biggest exporter of wheat and it generally accounts for 20% to 30% of the global total. The U.S., Canada, Australia, the EU-27 and Russia-Ukraine-Kazakhstan together usually supply around 90% of the wheat to the export market. France is the major source of wheat from the EU, with Germany being a distant second. Expect major wheat importing regions- North Africa and the Middle East, East and South Asia, and South America - to feel any production shortfall.

The USDA had projected a billion bushel surplus from this year's U.S. wheat harvest. Without this, global supplies would be severely strained. Nevertheless, wheat is rallying strongly with prices at the Chicago Board of Trade up 42 percent in July, the biggest monthly rally in 50 years. Wheat prices broke above $7 a bushel there on Tuesday. At the Kansas City Board of Trade, hard red winter wheat prices were at a 13-month closing high of $6.85 a bushel. This is still a far cry from the all-time high of $13.84 a bushel in 2008 however.

ETFs/ETNs that can be used to invest in wheat on the long side are GRU (around 50% wheat), JJG (around 30% wheat) and DBA (25% wheat) in the United States and WEAT and LWEA (200% leveraged) in the UK. Investors may wish to wait until there is a pullback though since wheat looks extremely overbought at the moment.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Agricultural Commodity Prices Weaken on Ample Supplies

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The USDA report on March 31st was bearish for grains. Wheat, soybeans, corn and rice all had significant drops in their last day of the quarter trading. Agriculture commodities have been weak since they peaked in 2008 and a sustainable rally in the immediate future is extremely unlikely.

Food commodities had big rallies starting in 2007 and these lasted into the spring of 2008, when most prices hit their highs. At the top, wheat was over $13 a bushel, soybeans over $16, corn around $7.50, and rough rice around $25.00.  Significant selling followed in later 2008 and into the summer of 2009. A late year rally from last year has now faded. Wheat closed out the first quarter at $4.505, down 21.5 cents or 4.6% on the day. Soybeans were at $9.41, down 33 cents or 3.4% and corn for May delivery closed at $3.45 down 9.5 cents or 2.7%. Rough rice was the least damaged dropping 24.5 cents or 2.0% to $12.215.

The USDA report didn't actually appear to be that negative. U.S. farmers will be planting 9% less wheat in 2010, although winter wheat plantings from last fall were 2% greater than they were initially thought to have been. The soybean crop should only be 1% larger than last year and corn 3%. In a bear market, news tends to be looked at with a negative bias though and there is overreaction to the downside. Agricultural ETFs with significant grain exposure, such as DBA, RJA, and GRU are all trading in bear market patterns with the 50-day moving average trading below the 200-day moving average. The cross just took place for RJA.

While the short-term picture for the grains appears negative, in the long-term prices will go up again. The ability to increase global food production is limited. There is little additional land that can be opened for cultivation and the big yield increases from the Green revolution - use of cross breeding to produce sturdier and more productive plants, the introducion of nitrogen based fertilizers, and extensive applications of pesticides, fungicides, and herbicides - are in the past. Population continues to grow though and the ability to produce more food isn't keeping up. At the same time, improved economies in emerging markets means a greater demand for food from large numbers of the underfed. The basic realities of supply and demand will eventually cause food prices to go back to their 2008 highs and probably much higher. The charts will tell us when this is likely to happen.

Disclosure: None

NEXT:  March Employment Numbers Better Thanks to Government Hiring

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Interest Rates Break Out

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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Almost everything went down last Friday, everything except the U.S. dollar of course. Continuing the pattern that has been very noticeable since this March, stocks and commodities both retreated as the dollar went up. Looking back at a 10-year chart, you will notice that the stock market and the U.S. dollar used to move together. Somewhere between 2003 and 2005, the pattern changed and they started moving in opposite directions. The pattern actually only became more exaggerated this spring. 2003 was when the Fed lowered interest rates to one percent, which in turn made the real estate bubble take off.

Liquidity is driving this pattern. Liquidity has also made it possible for interest rates to remain low during the last several years. During 2009 however bond prices have only been kept high because the Fed is buying a boatload of treasuries with freshly printed money (note: interest rates go down when bond prices go up and vice versa) while keeping overnight rates around zero. While the Fed has extended its purchase of Agency debt (mostly Fannie Mae and Freddie Mac) until March 31st, it is supposed to stop its quantitative easing program for treasuries on Oct 31st. It remains to be seen how long they will be able to stay out of the bond market. My guess is the printing presses will not remain idle for too long.

Bonds also sold off on Friday. Interest rates bottomed last December, with rates for the 10-year bond falling to around 2.00% and on the 30-year bond to 2.50%. By June, interest rates had approximately doubled to 4.00% and 5.00% respectively. Bonds rallied since then (and interest rates came down). Early this month both the 10-year and 30-year interest rates (not prices) bounced off their respective 200-day moving averages. This was the buy point, although some market watchers claim that 3.48% and 4.30% are the key rates that need to be broken for the 10 and 30-year bonds to be shorted. The 10-year yield closed at 3.48% and the 30-year at 4.29% on Friday, but were at 3.52% and 4.32% this morning - both above their key resistance. To see the interest rates charts on Big Charts (http://www.bigcharts.com/) use $TNX and $TNY for the ticker symbols.

I have already been buying TBT, the 200% leveraged short 20 to 30 year bonds ETF, for awhile now. This has a place at the moment in inflation sensitive portfolios, but should not be a huge position. Silver is my biggest holding and its strength on Friday was impressive. Almost by itself silver managed to buck the selling tide and punch higher. Gold is my next largest holding and I have 200% long silver and 200% long gold in an approximately 60/40 ratio. Mining stocks and the ETF GDX are next. I am trying to move agricultural commodities to become my 4th largest positions and hope to accumulate more GRU on a sell off this week (I already have all the RJA I wish to hold). TBT may wind up in the 6th or 7th place. All of this is likely to change early next year, when I anticipate exchanging a certain amount of my precious metals holdings for oil positions and other portfolio revisions will need to be made.

NEXT: Central Banks Support the Dollar

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dollar Breaks Down; NovaGold Breaks Out

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. dollar had a serious technical breakdown last night. The trade-weighted dollar traded as low as 75.44 in the pre-market this morning, well below important support at 76.00. Almost every currency on earth is rising against the greenback in a global orgy of dollar dumping. Behind the scenes buying efforts of central banks to prop up the U.S. currency have failed so far. They have yet to bring out the big guns, although they have little ammunition to put in them if they do. Even under the best of circumstances holding up a collapsing currency is like trying to stop a tsunami.

Gold and silver have become the collateral damage of the central bank efforts, but this is only evident in U.S. trading. Gold hit another record high last night in Hong Kong, selling for over $1070 at one point. It traded in the mid $1050s in early New York trading. Silver hit $18.09 in Hong Kong, another yearly high, but was $17.71 shortly after U.S markets opened. You can expect the battle for gold and silver pricing will eventually be won in Asia.

The best performing mining stock in North America yesterday was NovaGold (NG). This has been the favorite mining stock of the New York Investing meetup for a few months now and members have been encouraged to accumulate it at $4 and under this summer. Nova closed at $6.02, a new yearly high, yesterday and broke out of the handle of a cup and handle formation. While earnings were released yesterday, current income is not the relevant factor in NovaGold's stock price. It owns probably the biggest untapped gold deposit in the world. This asset only becomes more valuable as the price of gold goes up. The bears have been trashing Nova all the way from its recent low around $3.30 to the current $6.00 price telling everyone to sell the stock. Expect them to come out of the woodwork now that the breakout has taken place and they are really getting killed in their short positions.

The falling dollar is helping to prop up other commodities (all of which are priced in U.S.dollars). Light sweet crude oil almost hit $74 this morning and looks like it might finally reach an important Fibonacci retracement around $77. Seasonal weakness is likely to restrain oil prices this fall and early winter however. There may be more follow through today in the big rally in grains that started Monday (GRU is the ETF for this investment). There should be a pull back within the next couple of weeks or so that provides another entry point however. Long term bonds were also selling off this morning and interest rates rising. Double short ETF TBT, which rallied strongly off a bottom last Thursday and Friday should be watched. Holding a country's paper assets when its currency is declining is never a good idea.

NEXT: The Dollar, the Fed, Housing and the Economy

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dollar Breaks Support ... Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. dollar fell below important support at 76.00 this morning. This is the third break of this level. The low yesterday was 76.02. So far today the trade-weighted dollar has been as low as 75.74 in the pre-market. This is another new yearly low. It will probably be the low for today because it certainly looks like some form of intervention took place to support the dollar when U.S. trading opened. Some weak chart support exists for the dollar at 74.00 and much stronger support around 72.00. The all time low is 71.50.

Market intervention in the U.S. can be seen in the trading of the precious metals as well. Gold was as high as $1068 (a new all time high) in London and then dropped around $10 shortly after trading in New York started. Silver reached a high of $18.02 in London and then dropped a whopping 40 cents after the New York open. Precious metals falling when trading in New York opens is not uncommon. It is in fact a recognized phenomenon that has been going on for decades. Academics studying the issue have concluded that the probability of this long term pattern taking place by chance is essentially zero and that only manipulation in the U.S. markets can explain what is going on. The CFTC, the U.S. regulatory body that is supposed to keep trading on the up and up, of course sees nothing, knows nothing and apparently reads nothing.

Platinum and palladium are less affected by U.S. government dollar manipulation than the monetary precious metals. They are mostly industrial metals which have extensive use in the auto industry. Palladium has been the best performer the last few days, but there is no ETF available in the U.S. to trade it (there is one that trades in London), even though one was announced last April. While the U.S. auto industry is collapsing again after the Cash for Clunkers program expired, this is not the case in China. Auto sales are up almost 84% there year over year. The rapidly growing Chinese car market is now bigger than the faltering U.S. car market. Think about that.

Meanwhile grains have been rallying nicely. Both RJA and GRU were up in the 4% range yesterday. GRU is more volatile and consists only of grains, with beaten down wheat the largest component. RJA is a basket of 20 different agricultural commodities. GRU confirmed a double bottom as a result of yesterday's trading action. Oil was trading around $74 this morning, not much different from the price in late June when we recommended selling DXO. Oil is seasonally weak in the fall and early winter when the precious metals are at their strongest. In the long term, uranium prices are connected to the price of oil, but the correlation can be very loose in the short and intermediate term. Dennison Mines (DNN) had some peculiar price movement Monday with a sharp rise at the close that appeared on the daily charts, but not the intraday charts until this morning. Trading volume was heavy yesterday. This definitely bears watching.

NEXT: Dollar Breaks Down; Nova Gold Breaks Out

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.