Eat Your Wheaties!

11/20/2008 1:00 pm EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Grains are coming back in favor, says Eric N. Roseman, editor of The Commodity Trend Alert.

With the CRB Index 46% off its July all-time high, the majority of raw materials remain well below their best levels. The entire complex is still fragile in November, despite recent signs of government-injected stability into global capital markets. While stocks are about 10% above their October lows, commodities are just 1% above their recent lows.

It's time for commodities to start rallying again. And despite the best crop yields in years for 2008, farmers are now coming under pressure as the credit crisis delays planting, financing of important fertilizer and machinery. This implies supplies will tighten markedly next year as more farmers go out of business following a crash in prices since July.

Since hitting nominal highs earlier in February, wheat prices have crashed 60%, soybeans have plunged 43%, and corn prices have tanked 52% since late June. To be sure, grain prices were enjoying a fantastic rally off their lows in 2005-2006; but that trend died a painful death starting in July as the dollar started surging coupled by a freeze in credit markets and finally a crash in world markets.

The fundamentals for both grains, gold, and silver sectors look much better following big declines since July while the dollar—heavily overbought—is now starting to look tired following a massive move off its lows. In short, it's time to start buying some commodities again.

I recently surveyed trends across the largest grain-producing nations. The results are alarming. Many emerging market and even major market countries that grow wheat and other crops are facing serious difficulties securing financing. In Brazil and Argentina, for example, production may decline by 20% or more next year because farmers can’t get loans to buy fertilizer or potash. Basically, lending has stopped. Borrowing costs have increased and farmers are struggling to secure loans as banks and grain processors like Cargill (private) and Archer-Daniels-Midland (NYSE: ADM) grow less tolerant of risk and curb making loans.

According to the USDA, global inventories of corn, wheat and soybeans before the harvest in the Northern Hemisphere next year will be the second lowest since 1974 or enough for 67 days of consumption compared with 144 days of supplies in 1986. And according to AgResources, a Chicago-based agriculture consultancy firm since 1979, "stockpiles are going to be extremely tight. The world cannot afford any dislocation in production next year or there will be a real shortage."

It's time to buy a diversified basket of grains and even sugar.

I'll also add the inflationary consequences of this ongoing bail-out—probably more than $2 trillion dollars before it's all over will also support our commodities investments. That moment is approaching.

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