Plant This Seed in Your Portfolio and Watch it Grow!

Eric Roseman (August 12, 2010)

Rising Grain Prices Leading to Higher Prices for Consumers, And Bigger Profits for Investors

With traders and money managers set to return to work after Labor Day weekend, if you haven’t already devised your end-of-2010 investing strategy, now is the time to ensure that you get your year-end bonus … from your portfolio!

As we began discussing last week, having a portion of your investments in commodities is critical to a well-balanced portfolio. And the next stop in the hunt for exceptional natural-resource bargains is in the grains sector.

This particular part of the commodities universe remains exceptionally cheap. And that’s the kind of setup I love – when small plays can lead to big potential rewards!A ‘Grainy’ Picture Becomes Crystal-Clear

A major breakout is under way in the distressed grain sector.

Corn, wheat and soybeans have been pounded over the last 12 months, following record harvests in many countries.

And now they are on an uptrend thanks to lower-than-expected U.S. yields this growing season and bad weather in important growing regions.

Farmers just about everywhere are wrapping up record harvests.

World grain production this is expected to exceed demand for a third-consecutive year.

So far in the United States, 2010 has been the best growing season since 1973! The same is true of other important grain growing countries like Russia, the Ukraine, Australia, Brazil and Argentina.

The Growing Season … for Investors, That is

Wheat, soybeans, corn, oats and barley are all down more than 75%, adjusted for inflation, over the past 30 years. This is because booming harvests and great weather in 2010 have created surpluses.

And when it comes to investing in this sector, a bountiful harvest means slaughtered markets.

But nature’s not being so kind to farmers anymore… and rising wheat and other grain prices means a bigger bill at the supermarket for consumers.

When supply is punished, however, investors are rewarded. So, now is your chance to take advantage of discounted 2010 prices for 2011 profits – which can more than offset those rising grocery costs!

Fires in Russia are Only the Beginning…

Russia has lost 20% of its wheat to drought, extreme heat and, recently, fires. (What do you get when you mix extremely dry grain with 104-degree temperatures?)

And Russia’s doing what anyone would – looking out for No. 1!

Prime Minister Vladimir Putin has banned exports, to keep Russian grain at home.

Last week’s announcement shocked the grain markets. Wheat prices hit a two-year high Thursday before declining Friday .

During the last several months, I’ve been waiting to pounce on this important sector because it remains one of the most-compelling long-term investment themes amid a rising population and a decline in agricultural output.

That time, my friends, has come. Here’s why…

Outgrowing the Earth Means a Good Year for Grain Investors!

Amazingly, just three years ago a global food crisis developed…with dozens of riots across emerging markets as food prices went through the roof following record crop shortfalls.

Governments urged farmers to boost grain output as a result and they did just that.

Record prices typically result in record yields at some point. Farmers go where the money is – just like any other businessmen.

Years ago my friend Bob Meier at RMB in Chicago FedExed me a superb book, “Outgrowing the Earth: The Food Security Challenge in an Age of Falling Water Tables and Rising Temperatures.” I highly recommend it.

The book was a huge eye-opener for this commodity bull because it drove home the case for a massive bull market in grain prices at some point in the future.

Falling water supplies, booming demographics, loss of arable lands in the emerging markets due to rapid industrialization and rising global temperatures all combine to challenge supplies over the next decade and beyond.

No Better Time for ‘The Grain Trade’

The way I see it, consumption is quickly heading directly into a brick wall as it pertains to long-term production challenges.

China has started importing corn, and all it takes is one poor harvest and we’ve got a massive price spike. The same is true for wheat.

As markets tend to discount ahead, it seems to me that all the good news regarding record or near-record crop yields is pretty much “baked into the cake” by now.

On the charts, ETFs and stocks in the sector are starting to break out, and seasonal strength makes this a bullish time to invest.

According to “Thackray’s 2010 Investor’s Guide.” the period from Aug. 1 to Dec. 31 is considered seasonal strength for agricultural stocks. The seasonal trade has been a winning ride for investors in 12 of the past 15 years, for an average gain of 16.3% compared to 2.5% for the S&P 500 Index.

I like grains or futures that represent corn, soybeans and wheat. Unlike stocks (including fertilizer stocks) the grain futures maintain a negative correlation to the broader market over the longer term.

Do Growers Have Too Much Faith in Mother Nature?

Crop conditions in the U.S. Midwest have been ideal this year, and U.S. grain yields could hit a record if weather conditions remain bullish.

But hot, dry weather is now engulfing great parts of the country – the U.S. is the world’s largest corn exporter – and I think the charts show a major change coming our way after a two-year bear market.

And Mother Nature is dimming her support for farmers and low prices as crops almost everywhere are either drenched by rain or extreme heat.

Wheat prices surged to a six-month high this summer as the hottest weather in more than a decade threatens crops in Europe.

Play the Grains Space Now

I am a long-term grains bull. I believe we’ll see increasing demand from emerging markets and a growing population amid shrinking supply due to climate change.

And shrinking supply plus growing demand means one thing for commodities investors: Profits.

I remain bullish, but cautious. I am very carefully choosing portfolio holdings for my Commodity Trend Alert subscribers. To receive my top commodity picks, join CTA now and get two months’ free. Click here to start your trial subscription right away!

Stay long and strong the right commodities,

Eric Roseman
Editor, Commodity Trend Alert

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