Sunday, May 11, 2008

Who’ll be next to the party at the commodity rager?

Note: This article was also published on Seeking Alpha.

Bull markets, like college fraternity parties, usually begin in relatively quiet fashion – with small participation, initial awkwardness, and some doubters. In both cases, things have a tendency to quickly kick into gear when they are driven by supply and demand fundamentals – be it alcohol, sorority women, tech stock IPO’s, or soybeans. Soon enough, the unlucky party hosts have a real rager on their hands, with better judgment being tossed out the window with the empty beer cans.

Energy (most notably, oil) tapped the first keg and kicked off the current commodity bull market. True to form, the acting University Dean, our United States Government, stepped in with a plan to “do something” and quell the drunken party revelers. And in the process, not only did their bone-headed plan not make a dent in the original energy party, but it kicked off another megabash next door – this one in the agricultural markets.

The government’s wise idea to divert our food supply into the fuzzy science that is corn-based ethanol lit a fire under the grain markets like a Flaming Dr. Pepper. And so we have $6 corn, $13 soybeans, and a limit on the rice available to Costco shoppers.

The super seniors at this commodity bash realize it has some room to run. Historically, the average commodity bull market lasts 17 years – better make another beer run soon.

So who’s likely to crash the party next? Well, the softs, such as coffee, cotton, and sugar, still haven’t made much of a showing. And judging by their run-ups in previous bull markets, we know these guys can party. Keep an eye out for them.

But my money is on the meat heads. High grain prices must force cattle and hog prices higher. In fact, farmers are slaughtering their herds early and sending their meat to market now, rather than fattening up their herds on sky-high grain prices. This has temporarily pushed down prices, but is setting the stage for a dramatic upcoming shortfall in supply – Don Coxe alludes to this in an interview on BNN. Also check out the CEO of Tyson Foods on CNBC saying that their meat prices must rise, as 60% of the cost of raising an animal is feed.

How should you play this? As a consumer, you may want to load up your freezer with some cheap meat. As an investor, the most direct way to play this trend is by buying longer-dated futures in the meat markets. In lieu of a futures account, you could also consider the ETF COW, which holds a mixture of live cattle and lean hog contracts.

But you’d better act soon to lock-up your late night snack. Live cattle futures have broken out recently –and meat may be off to the races already.

Related resources:
· Blogging Stocks – COW: Resources expert turns bullish on meat
· DailyWealth – How to buy high-profit corn
· Growth Stock Wire - A Commodity the Bull Market Forgot

4 comments:

Heem said...

Why did you choose the pork bellies over the lean hog's contract to bet on the swine market?

SugarHigh said...

To my untrained eye, the pork bellies chart looked a like a breakout - I'd like to see lean hogs confirm its current leg up a bit more before jumping in there.

Jay Rao said...

are you buying 'futures' or 'futures options' when you are referring to Live Cattle. I see that Live cattle is traded as LC on CME.

besides, why not simply buy COW etn instead of the futures? I am guessing it is for leverage.

SugarHigh said...

I'm buying regular futures, though options would be another way to play it.

I am slightly wary of ETF's such as COW, DBA, GLD - they are probably fine to speculate in and out of, but I'm not sure they are the best thing to hold if doomsday arrives.

In my case, I use my stock accounts for other things - and as Doug Casey recently said about this trade, you can't kiss all the girls. Doug is starting up his own cattle herd in Argentina as a very pure way to play this.

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