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.

The Inflation Trade

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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Gold had another record close yesterday, the third one in four days. The near term futures contract closed at $1018.90 and was as high as $1023.30 intraday. The breakout level is $1004 and above. Gold still needs to take out its all-time intraday high of $1033. Silver closed at $17.33 and traded as high as $17.50. The New York Investing meetup mentioned gold was a good buy at $740 and silver in the the $9 to $10 range. We have also discussed in our meeting the ETF's DGP and AGQ that are 100% leveraged and move twice as much up and down as gold and silver do. These highly volatile ETFs are not appropriate for risk-adverse investors. For those who want to broaden their investments to include gold and silver miners , we proposed the ETF GDX. Our favorite gold stock is NovaGold (NG) which was first mentioned in this blog when it was just above $3.

The precious metals are going up for the same reason as global stock markets. Governments throughout the world are pumping massive amounts of liquidity into the financial system. This shows up in stock prices first and in consumer inflation later (it can take many years before the full impact is felt). The statistics indicating economic 'recovery' are usually not adjusted for inflation and what is being touted as economic growth by the mainstream media has a significant component of rising prices to it. This is only the beginning however. In a few years inflation is going to get incredibly ugly. When it becomes apparent that there is no 'real' growth, the stock market rally will fizzle - and the government will print even more money to stimulate the economy. The stock market is currently historically overbought based on some criteria. Over 90% of stocks on the NYSE are trading above their 200 day moving averages. A number in the 70% range is usually enough for a top.

Gold and silver are the ultimate protections against inflation and anyone concerned about inflation should make them the cornerstone of their investing strategy. I will hold as much as 50% of my portfolio in these metals and their miners during their bullish periods. The other two major inflation hedges are energy and agricultural commodities. Oil is seasonally weak in the fall and usually best bought early in the year and sold in the summer (as the New York Investing meetup did with DXO). Its seasonal pattern is almost the exact opposite of gold and silver's. Natural gas is the energy commodity of choice at the moment since it is seasonally strong in the fall. Agricultural commodities are dependent on weather as well as inflation. Good weather during the U.S. summer has driven many of their prices to very low levels. It might be worth taking a look at RJA or DBA (RJA is more diversified) and start putting a little of them away for a non-rainy day.

The other inflation trades include industrial metals and shorting long-term U.S. bonds. The New York Investing meetup mentioned FCX in the winter and Alcoa (AA), UYM and XME in the spring (as well as Harry Winston - HWD). These stocks have already had major rallies. They are partially dependent on inflation and partially dependent on the economy doing well going forward, so they are not the major bargains they once were. The short bond trade did well between December and June (bond prices went down and interest rates went up), but there has been some give back during the summer. TBT is a leveraged ETF that allows the average investor to short long-term bonds. When the economy heats up, interest rates go up. During bouts of inflation interest rates go through the roof. TBT works if either or both take place and it is currently at a reasonable price.

NEXT: Quadruple Witching Today; Market Update

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.