Marc Faber's 3 Favorite Commodity Picks Right Now

Last night, we posted a Marc Faber interview over at our sister site, The Contrary Investing Report.  Most of the interview focused on Faber's outlook for China - he believes a crash is coming within the next 12 months.

For us commodity traders, Faber dropped a very nice tip right at the end of the interview.  He thinks agriculture is getting real cheap - perhaps making a major bottom - and specifically said that corn, wheat, and soybeans could be interesting plays.

As you can see, the grains (represented below by ETF DBA) have not "reflated" much over the past year - they've been largely left behind:

Are the grains forming a major bottom? (Source: StockCharts.com)

In my experience trading the grains, I've found that it's best to wait for them to make a move, before piling in. Major breakouts are often excellent times to buy.  

So we'll be keeping an eye on this developing story, and my interest is certainly piqued after Faber's comment.

Recommended reading:

• David Rosenberg's latest comments on the money supply and deflation
• Robert Prechter shares 8 bearish technical indicators
• Our Sacramento Casey Research Phyle Wrap for our May meeting

Corn Demand Projected to Outpace Supply This Year

The LA Times reports that corn supplies are tightening, with supply/demand projected to be "upside down" this year:

This year's harvest is expected to yield 11.9 billion bushels, down 155 million from last month's projection. The decline is due to soggy weather in such corn-producing states as Illinois, where farmers have delayed planting.

Total use of the corn crop is projected to be 12.5 billion bushels, which would outstrip this year's supply by 525 million bushels.

That means the corn surplus would be drawn down heavily, according to the USDA report, leaving about 1.1 billion bushels at the end of the year. That's 510 million bushels fewer than USDA analysts had expected.

Also, supplies are very low for...drumroll...soybeans! Lowest supply levels since 1983 according to the article...when demand was only half of what it is today, to boot.

Thanks to my friend Jonathan of Lederer Private Wealth Management for passing this piece along.

New USDA Crop Progress Report

The USDA just released its latest crop progress report.

Most of the grain crops look to be in pretty good shape, with the exception of soybeans, which are still behind schedule.

Wheat's been slammed the past few days after a speculative run-up, so it appears this news was priced in. Not much movement from corn and soybeans.

It still looks like soybeans are the most intriguing play in the grains complex - with strong demand expected to continue from China, and a harvest running behind schedule.

Beans Heading For The Teens (Again)? Supplies are Tight...Very Tight

Global supplies of soybeans may be yet tighter than estimated by the USDA, according to a recent report by Hard Assets Investor:

Recent estimates of U.S. old-crop soybeans - those still around in silos as of August 31, 2009 before the new harvest starts - depend on who you talk to. The USDA puts old-crop carryout at 130 million bushels, but other estimates on AgricultureOnline say that number could be as low as 60 million to 80 million bushels.

"An extraordinarily tight number by historical (or any) standards," says Vic Lespinasse, CBOT market analyst and floor trader with GrainAnalyst.com.

Why the big difference? Hard to say, but the USDA relies on reported data and the analysts the media talk to tend to be the frontline traders, so their estimates may be a bit more accurate.
Either way, supplies are tight - 130 million bushels is about one week's global supply.

Read the full article at Hard Assets Investor...

They make a very compelling case - I wasn't aware that supplies were this tight, and to be perfectly honest, I was just "buying the chart."

Beans look posed to continue their rally, with tight supplies and very strong demand from China. What could go wrong? A rally in the dollar, or a faltering of the Chinese economy, could put a damper on beans, at least in the near term. I'm still holding myself, looking to add another long contract on further strength.

Beans in the teens once again? Could be just around the corner.

This Ain't Your Grandpa's Deflation...This Week in Commodities

Common wisdom holds that depressions are inherently deflationary.  The United States in the 1930's.  Japan in the 1990's and 2000's.

Combine a depression with other deflationary factors going today in the US - demographics, deleveraging, falling asset prices, even productivity - and you've got some serious deflationary headwinds.

(As a side note - I've warmed to the view that gentle deflation, as a result of increasing productivity, is the optimal, and honest, situation that promotes both savings and economic growth.  It's silly to label all deflation as "bad" or "evil"...how can deflation created by increased productivity be bad?  But I digress.)

Ben Bernanke, a student of the Great Depression, believes that the Depression could have been averted if deflation had been averted.

Determined not to repeat the mistakes of history - or what he thought were the mistakes of history - Bernanke took unprecendented measures...first, lowering interest rates as far as they would go...next, utterly trashing the Fed's balance sheet...and finally, when all else failed, he cranked up the printing presses.

Printing money always leads to inflation...in fact, printing money...or quantitative easing...is inflation.  Rising prices - which follow - are the symptoms of inflation.  

But what if you just print the money "for a little while"?  That's right - print it up, float it out there to keep the economy from grinding to a halt - and then when things are moving again, start to pull it back in.

Doesn't it sound insane?

Well, this is what is being tried.  And as hyperinflationary as this sounds, even the most fervent inflation hounds believe it will be a year or two or three before we start to see inflation creeping into the system.

Too much credit was destroyed, the velocity of money slowed down too much...logical reasoning dictated that it would take the Fed time to print enough to make up the gap...even at the rapid rate in which they were printing.

Then a funny thing happend while we were chilling out, getting comfortable, and generally not worrying about inflation - commodity prices started to move up.  The dollar started to drop.  Bond yields started to climb.

Falling Dollar, Rising Bond Yields = An "Uh Oh" Sandwich

Remember when every investor in the world was worried about the dollar's poor fundamentals?  McDonald's was poking fun at the dollar in it's commercials...music videos were flashing euros...supermodel Gisele Bundchen asked to be paid in euros rather than dollars.

That marked a bottom - at least a short term bottom - in the dollar.  Everyone was on the same side of the trade - short the US dollar.  

When world financial markets collapsed, a global "flight to safety" and massive short covering propelled the dollar up, up, and up.  

For awhile, nobody worried about the dollar's fundamentals...at least in the short term.  The Fed's printing money?  Hey, no problem, the dollar's still the world's reserve currency.  Besides, other countries are printing money too.  Why worry?

In the meantime, the dollar quiety began to slide...and the dollar index is now sitting at its low point for 2009:

It's a quiet race to get rid of US dollars once again. 

(Source: Barchart.com)

Makes you wonder if currency fundamentals do, in fact, still matter...if printing money is indeed bearish for the value of the currency being printed.

Meanwhile, what has The Fed been doing with it's newly printed dollars?  It's been buying long dated US Treasuries to keep yields down!

Nobody else is buying this trash, so it's up to our printing presses to pick up the slack.  The Fed announced this "newly printed cash for trash" program last December - when yields on the 10 and 30 year bonds were dropping, and deflation was king.

Common wisdom held that deflation, combined with these "monetization purchases" by The Fed, would continue to drive rates down...possibly all the way to zero.

But a funny thing happened on the way to Japan...rates bottomed on December 18, 2008, and have been climbing ever since!  Long dated Treasuries have been slammed throughout the first half of 2009!

30-Year Treasuries are not behaving like we're in a deflationary environment

 (Source: Barchart.com)

Uh oh...this is not good.  What a Fed to do?

If they let interest rates rise - that will surely squash whatever is left of the US consumer.  Green shoots turn into marajuana buds - game over.

But the only way to prevent interest rates from rising in the near term (short of cutting government debt, which we know is not going to happen) - is to step up their purchase of long term bonds.

So applying a little game theory to the Fed's current hand - we have to expect them to sacrifice the dollar.

The twist, I believe, is that the dollar could get trashed quite soon.  So I would strongly advise you to take a hard look at your savings and investments - right now.  

Charts don't lie.  No matter what our personal beliefs or biases are about the future, no matter what we think is going happen - we have to defer to what the markets are telling us.  And right now, the markets are starting to say "uh oh."

It could be a breathtaking move out of the dollar - it's value could feasibly get trashed in a matter of weeks, days, or even hours.  Don't be the one left holding the "Old Maid" card as the rest of the world runs for the exits. 

In Case You Missed It...This Week's 5 Most Popular Posts...

1. How to Time the Gold Market
2. The Dumbest Inflation Explanation I've Ever Heard
3. Marc Faber: We've Begun a 15-20 Year Bear Market in Bonds
4. What is the Breakout in Gold Stocks Signaling?
5. Can Commodities Decouple From Stocks?  This Week in Commodities

Positions Update - Back in the High Life Again!

What a week put by the Aussie...while the USD tanked, the A$ soared - moving up over 3.5 cents in one week!

I believe the Australian dollar could continue to rally further from here, and will be holding this position until we see a change in the trend.  Because we know that the trend is our friend!

OJ was down slightly on the week...some rain in Florida to snap the drought.  Prices held strong though...they could be consolidating before the next move higher.  We're still at fairly cheap prices on OJ, so there is room on the upside.

Not to cry over spilt milk - or in this case, spilt sugar - but I should not have "taken profits" in my sugar positions last week.  Just goes to show that when the trend is on your side, you don't sell and wait for a pullback...because it may never come!

Shame on me, and now I sit on the sidelines, waiting for a further breakout to the upside to reinitiate this position.

Finally with a little dry powder sitting around, I decided to "punt" on a Mini Soybeans contract on Friday.  Beans have been extremely strong, driven by demand from...you guessed it...China.  The soybean complex is a favorite of the Chinese - more so than corn and wheat - and as a result, beans have leading the pack as far as the grains go.

Soybeans are on the move, driven by Chinese demand. 

(Source: Barchart.com)

Current Account Value: $31,836.61

Cashed out: $20,000.00
Total value: $51,836.61
Weekly return: 11.6%
2009 YTD return: -37.3% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

USDA Planting Intentions Report Sparks Rally in Grains

Corn and soybean futures each jumped roughly 5% today after the USDA released its Planting Intentions Report.

Some quick highlights from the report reveal that there appears to be plenty of corn and beans coming our way, but cotton will continue to be neglected, as we had anticipated.

• Corn acreage is down 1% from last year, but is still projected to be the 3rd largest acreage in over 50 years.

• Soybean acreage is on track for a record year, up slightly from 2008.  This is below expectations though, hence the rally.

• Cotton acreage is projected to be 7% below last years total, and the lowest since 1983.  The Associated Press reports that low acreage and high production costs are being blamed.

Cotton futures rallied on today's planting intentions report.

Coffee Perking Up? - Weekly Commodities Review

Coffee Perking Up?

Long-time readers know that we've been quite bullish on coffee for some time in this space. So on Friday, when I received an email from my commodity broker, Robert, about possibly initiating a coffee position, I was extremely intrigued.

We wrote this article about coffee for Seeking Alpha last August.

Long-term fundamentals are very favorable for long positions. The world continues to increasingly caffeinate itself with coffee, driven by - you guessed it - China and the rest of East Asia. A small but growing coffee market continues to gain ground on tea, the traditional caffeinated drink of choice.

On the supply side, most of the world's coffee comes from Brazil. So coffee supplies are heavily dependent on the quality of the Brazilian harvest, for better or for worse.

Coffee fundamentals are set up for us to see a super spike over the next 5 years. I firmly believe we'll see $2+ coffee at some point. And coffee has not yet had a major run up, like many of the other agricultural commodities - so it's certainly due.

As you can see from the long-term chart, coffee has been in a bull market since 2001 - due to many of the reasons we've discussed above:


Here are the near term factors that may spur an upcoming coffee rally:

• Coffee demand in China is projected to continue to grow 20% annually, despite the current recession/depression

• Coffee consumption has a tendency to increase during recessions - consumption in coffee shops takes a hit, but people brew more at home
  

• The International Coffee Organization said earlier this month the 2009-10 crop could see a 5-million 60-kilogram bag shortfall in world supplies - note: coffee harvests have off-years every other year
  

More bullish/bearish factors for coffee:
http://www.insidefutures.com/article/94842/Foods%20and%20Softs%20Outlook%20for%20February%206,%202009.html

In summary, expect demand to stay strong, and let's keep an eye on the supply picture for potential shortages. Anyone in Brazil care to share a weather report with us?


Stopped Out of Soybeans - Corn Flat

We were stopped out of our two mini-soybeans positions mid-week. Beans rallied to finish the week, as did corn and wheat.

I like the double-bottom formed by corn this week. Had our stop in at 350 and it held.

Looking at this chart - wow, if this isn't a classic Fibonacci Retracement - gaining back 50-62.5% of the previous move down. If anyone knows how to identify the bottom in real-time, let us know!

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	377	$112.50
01/20/09	Long	1	MAR 09	Corn	397 1/2	377	($1,025.00)
12/31/08	Long	1	MAR 09	Cotton	48.52	49.80	$640.00
02/06/09	Long	1	MAY 09	Coffee 'C'	121.95	121.50	($168.75)
Net Profit/Loss On Open Positions							($441.25)

Account Balances

Current Cash Balance	$38,296.35
Open Trade Equity	($441.25)
Total Equity	$37,855.10
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$37,855.10

---------------------------------------------
Cashed out: $20,000.00
Total value: $57,855.10
Weekly return: -2.5%
2009 YTD return: -25.5% :(

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

Weekly Commodities Review - Next Stop: Gold $1,000

Next Stop: Gold $1,000

Gold has a date with destiny. Destiny may not be at the bar yet, but she's now definitely circling the parking lot, looking for an open spot outside the Gold $1,000 comeback party.


My comments on gold from last week's commentary, which were verified to some extent by the continued rally this week:

Adam Hewison of INO.com believes the gold market is getting wound up, ready to explode higher (check out his free video here). Long time readers know that I believe gold is heading much higher, because inflation is heading much higher.

Inflation is already through the roof - it's just that we are not yet experiencing the effects of this newly printed money, because the velocity of money has dropped off so sharply. Not that this has been any consolation to my wife - who I "protected" last July by shifting her entire 401K into gold stocks. I may have hit the exact short-term top in gold stocks.

I think Bernanke is fighting the wrong battle. As a student of the Great Depression, he's working to prevent deflation at all costs. And in the end, I think he'll be successful - and bring us a true inflationary nightmare.


Grains Still Rangebound

The grains were off a bit on the week, but still holding above the near-term resistance levels. We continue to hold, with stops set at our customary 15-day lows.



Cotton Down Slightly

Cotton dropped a bit over 1 cent this week. I'm not particulary concerned - this slowwwwwww developing uptrend still appears to be in place.


While demand for cotton is taking it on the chin, cotton supply seems to be taking an even harder fall. The Commodity Research Bureau projects that global cotton output will fall 7.4%, which outpaces the 6.1% year over year fall in global cotton consumption the USDA is projecting.

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	378 1/2	$187.50
01/20/09	Long	1	MAR 09	Corn	397 1/2	378 1/2	($950.00)
12/31/08	Long	1	MAR 09	Cotton	48.52	49.50	$490.00
01/13/09	Long	1	MAR 09	Mini Soybeans	987 1/4	981 1/2	($57.50)
01/13/09	Long	1	MAR 09	Mini Soybeans	989 1/4	981 1/2	($77.50)
Net Profit/Loss On Open Positions							($407.50)

Account Balances

Current Cash Balance	$39,223.08
Open Trade Equity	($407.50)
Total Equity	$38,815.58
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$38,815.58

---------------------------------------------
Cashed out: $20,000.00
Total value: $58,815.58
Weekly return: -5.3% :(
2009 YTD return: -23.6% :(

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

Weekly Commodities Review: Is Gold Breaking Out?

Gold Breaking Out?

Adam Hewison of INO.com believes the gold market is getting wound up, ready to explode higher (check out his free video here). Long time readers know that I believe gold is heading much higher, because inflation is heading much higher.

Inflation is already through the roof - it's just that we are not yet experiencing the effects of this newly printed money, because the velocity of money has dropped off so sharply.

Not that this has been any consolation to my wife - who I "protected" last July by shifting her entire 401K into gold stocks. I may have hit the exact top in gold stocks.

I think Bernanke is fighting the wrong battle. As a student of the Great Depression, he's working to prevent deflation at all costs. And in the end, I think he'll be successful - and bring us a true inflationary nightmare.


Rangebound Grains

A pretty quiet week in the grains, after last week's excitement (nausea). We continue to hold our corn and soybean positions, and are waiting for the market to tell us what to do next.



Cotton Rallies Late

A BIG Friday for cotton! The "Pakistan Observer" reports that cotton rallied on news a major merchant took out significant amounts of cotton from the exchange - hey, it's on the internet, so it must be true.

While demand for cotton is taking it on the chin, cotton supply seems to be taking an even harder fall. The Commodity Research Bureau projects that global cotton output will fall 7.4%, which outpaces the 6.1% year over year fall in global cotton consumption the USDA is projecting.


A Socialist Plea

Earlier this week, I felt compelled to step up to the plate and defend free market capitalism, after receiving this socialist plea from our local utility company.

What do you think - did I take it too far? Not far enough? You decide, Komrade!

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	390 1/4	$775.00
01/20/09	Long	1	MAR 09	Corn	397 1/2	390 1/4	($362.50)
12/31/08	Long	1	MAR 09	Cotton	48.52	50.55	$1,015.00
01/13/09	Long	1	MAR 09	Mini Soybeans	987 1/4	1006	$187.50
01/13/09	Long	1	MAR 09	Mini Soybeans	989 1/4	1006	$167.50
Net Profit/Loss On Open Positions							$1,782.50

Account Balances

Current Cash Balance	$39,223.08
Open Trade Equity	$1,782.50
Total Equity	$41,005.58
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$41,005.58

---------------------------------------------
Cashed out: $20,000.00
Total value: $61,005.58
Weekly return: 0.6%
2009 YTD return: -19.3%

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

Stratfor: Major Drought is Threatening Argentina's Agricultural Production for 2009

Stratfor reports that a major drought is threatening Argentina's agricultural crop for 2009.

According to the projections of the Buenos Aires Cereals Exchange published on Jan. 16, the country’s wheat yield for 2009 will be 8.7 million metric tons, down from 16.3 million in 2008 (domestic wheat consumption in 2007 was approximately 6.7 million metric tons). Total wheat planting dropped by 350,000 hectares, or 8 percent, in the 2008 planting season, and the drought has affected what has already been sown. Corn production is projected to drop from its 2008 figure of 20.9 million metric tons to 16.5 million metric tons, with a reduction in crop planting by 26 percent from 3.2 million hectares in 2008 to 2.4 million in 2009. Soybean output, meanwhile, could fall to 40 million metric tons if the drought continues — a 7 million metric ton drop.

Weekly Commodities Review: Which Side of the Corn Trade Should We Take?

On Monday, the USDA released it's agriculture supply and demand projections, which sent grains "limit down" for the day across the board, and many of the softs down sharply as well.

That proved to be the worst of it - as grains slowly recovered during the week as the market digested the news, finishing the week off with a sharp rally on Friday.

As you can tell from my positions as of last Sunday, I was not prepared to handle a "limit down" day across the grains board. It's one of those days that, as a leveraged trader, you just want to vomit.

I had an offsite meeting in the morning, so returned to the home office after markets had closed to see the carnage. Not only was I down 25% (!) on the day, but also still had these positions open. Everything had closed limit down, and I had no clue where this market was going to find a bottom - and even when I'd be able to get out of these positions.

Fortunately I was able to get out that evening during the Asian trading sessions - basically covered the grains positions and also my Treasuries short, leaving only cotton open.

Then while sipping some wine and reading the WSJ later that night, I read analysts mentioned they liked soybeans more than corn. So the next day, I went long soybeans, and short corn - nothing like a little wreckless pair trading to get over a big loss.

Well this trade actually held up OK until Friday morning, when, bless his heart, my commodities broker Robert gave me a call.

"Brett, I'd really like to get you in on this corn trade. It's trading $0.50 below the cost of production. Farmers are already switching to soybeans."

After picking Robert's brain for about 10 minutes, I had him put the trade through for me (he manages my Rollover IRA account), and ran to my computer here to cover that corn short, and then go long.

Phew - not a moment too soon - corn finished the day on a sharp rally.

Yesterday I did some online research and found that, indeed, it could be a difficult year for corn farmers. $4 corn ain't what it used to be for these guys, with input costs sharply higher these days.

We'll continue to watch the corn markets closely.



Recommended reading:

• Doug Casey believes we've begun what he calls "The Greater Depression." In this insightful article, he explores the foundations of the current crisis we're facing.

• Sugar prices continue to climb, and there could be a supply shortage shaping up soon.

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	389 3/4	$750.00
12/31/08	Long	1	MAR 09	Cotton	48.52	48.84	$160.00
01/13/09	Long	1	MAR 09	Mini Soybeans	987 1/4	1020	$327.50
01/13/09	Long	1	MAR 09	Mini Soybeans	989 1/4	1020	$307.50
Net Profit/Loss On Open Positions							$1,545.00

Account Balances

Current Cash Balance	$39,234.38
Open Trade Equity	$1,545.00
Total Equity	$40,779.38
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$40,779.38

---------------------------------------------
Cashed out: $20,000.00
Total value: $60,779.38
Weekly return: -16.0%
2009 YTD return: -19.7%

2008 return: -8%

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

WSJ: US Data Sinks Corn, Soybeans

CHICAGO -- A set of bearish government estimates released Monday reignited concerns about anemic demand amid a world recession and sent Chicago Board of Trade grain and oilseed futures plunging, analysts said.

CBOT corn and soybean markets fell by their exchange-imposed daily trading limits. March corn fell 30 cents to $3.8075 per bushel while nearby January soybeans fell 83.50 cents to $9.54 per bushel.

Rest of article (WSJ Online subscription required)


Editor's Note: Analysts quoted in the article believed soybeans may bounce back faster than corn, due to several supply/demand factors that are favorable to soybeans.

Corn, Wheat, Soybeans Slaughtered After USDA Projections

Grain futures plummeted today after the USDA issued it's supply and demand report, which projected larger supplies than previously forecasted. You can read the gory details of the full report here - or glorious details - depending on which side of the trade you were on.

Corn, soybeans, wheat, rough rice all basically closed "limit down" on the day, dropping the maximum allowable amount.

Wheat takes a nosedive after reading the USDA report.

My personal take on this report - in a word, "ouch." Can't say I saw this one coming - grain charts had been looking quite frisky of late, or so I thought - it's probably safe to call the grains bull dead for a little while after reading the supply/demand breakdown. I'm going to try and keep what powder I have left dry for awhile, so that we can reload down the road.

Stratfor: Fall in Food Prices Likely Temporary

Stratfor reports that the current drop in food prices is likely to be temporary, because falling prices and the credit crunch will reduce supply next growing cycle.

The article confirms something we've been discussing here at length - the trends which originally brought about the supply/demand imbalance in the grains markets are still firmly in place, and that these supply constraints will remain until there is a large structural change in supply or productivity.

Food Supply Problem More Acute Than Ever

Chris Mayer writes in Agora Financial's Rude Awakening that the global food supply problem is more acute than ever before, as a result of the current financial crisis.

This is something we've been discussing here of late. Farmers cannot get basic loans for fertilizer. Forget about new capital investments. And this all happening with world inventories of the grains hovering near historic lows.

BOTTOM LINE: Pick up some agricultural commodities at these depressed prices. Ag-flation is coming - you may as well profit off it!

Are Any Grains Worth Buying at These Prices?

Are there any grains worth buying at these prices? Have you seen any article, commentary that may be of help?

This question was posed by our buddy and regular reader/contributor Moyo, who runs the fine commodity focused site FuturesCafe.

I think that sugar, cotton, and coffee are the most attractive agriculture plays at this point. For the simple reason that their prices have not moved up recently - therefore, additional supply has not come on the market. Couple this fact with the further tightening of supply that commodities will experience across the board as a result of the current state of the credit markets, and these, I believe, are good candidate commodities to lead the way up.

Cotton is the most attractive investment opportunity I can see - it is actually trading below the prices it was at when the bull market in commodities began in the first place.

Cotton's price spike in 07-08 was really a speculative phenomena. Traders started piling into cotton futures contracts, as everyone knew cotton was destined for a spike - driven by reduced supply as farmers planted higher priced corn and soybeans in lieu of cotton.

The self-fulfilling prophesy proved to be short-lived, as the market was not able to sustain a rally. But it's coming.

Wheat also may be worth a look here. Corn, rice, and soybeans interest me less, as they are coming off a recent run-up, and have been planted from sea to sea across the world. It may take more time to work off the new supply on the market - though it's possible that prices already reflect this.

BOTTOM LINE: "Ag-flation" is coming again, in a very big way. Agriculture is very attractive at current prices, but I would caution you against being "early" into these trades. Wait for an uptrend - you'll have plenty of time to build up your positions, as commodities, particularly agriculture, are likely to be the first assets to recover in price.

My Current Commodity Futures Positions - 10/05/08

Top posts from the past week:

• Financial Times: Wealthy Investors Demanding Unprecedented Amounts of Physical Gold
• Jim Rogers on CNBC 10/1/08
• Quick Thoughts on the Latest Black Monday
  

A review of my trades from the week that was:

• Closed out my Swiss Franc position - Yikes - this trade did not work out, I got hammered big-time. The Swissie was up big on Black Monday as the carry trade unwound...but probably not as big as it should have been. That should have been a cue for me to get out, but I hung in until around the 0.90 mark and got out.
  

Other existing positions I've got:

• Long the Japanese Yen - The Yen was way up early in the week as the carry trade was unwound in a big way on Black Monday. Then it came back down to Earth - but all in all, another impressive week in the face of continued (surprising?) strength from the US dollar.
  

• Long Gold - Very tough week for gold, but as we've discussed in this space before, I believe the government's printing of money as fast as it can will send the price of Gold and Silver higher. And not to sound like too much of a broken record here - but how long can spot prices stay low, when you can't buy the physical stuff?

• Short Soybeans - Soybean futures broke down in a big way this week. I plan to stay the course as a short.
  

• Short 10-Year Treasuries - I am quite bearish on long-dated US Treasuries. I think interest rates have to rise, and rise significantly, as I can't imagine the world will continue to lend the US government money at these bargain basement rates. Anyone care to finance a $700 billion bailout plan, by the way?
  

My wish list (waiting for an uptrend...and we could be waiting for awhile):

• Sugar
• Cotton
• Coffee
  
• Natural Gas
  
• Silver

Open Positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
09/04/08	Long	1	DEC 08	Japanese Yen	0.9340	0.9553	$2,662.50
09/24/08	Short	1	MAR 09	T-Note (10yr)	113-245	114-315	($1,218.75)
09/17/08	Long	1	DEC 08	Mini Gold	864.6	839.0	($849.92)
09/09/08	Short	1	NOV 08	Mini Soybeans	1168 1/4	989	$1,792.50
Net Profit/Loss On Open Positions:							$2,386.33

Account Balances
Current Cash Balance	$50,397.12
Open Trade Equity	$2,386.33
Total Equity	$52,783.45
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$52,783.45

Cashed out: $20,000.00
Total value: $72,783.45

Weekly return: -6.0%
YTD return: -5.2%

***"Cash out" mostly means taxes, but lately I've also been using it for living expenses, and also to finance a software startup I'm working on.