Investors Are Hungry for Grain

01/08/2008 12:00 am EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says grains and other agricultural commodities continue to soar, and he recommends an ETN that would benefit.

As the global economy softens in 2008, two primary commodity sectors should defy slowing consumption in raw materials: precious metals and soft agricultural commodities.

The threat in 2008 is that a hard economic landing in the United States will deal a severe blow to the commodity bull market, now entering its seventh year. But for investors in the agricultural commodities-namely the grains-the indications are that food, feed and fuel crops (e.g., biofuel and biodiesel) will remain subject to the healthy demand and tight supply conditions that have become more protracted and frequent in recent years. Every investor must have exposure to this asset class.

And best of all, soft commodities maintain a negative correlation to common stocks-a great portfolio benefit and a solid hedge in down markets.

The supply picture for the grains complex continues to grow dire by the week. But despite hitting nominal highs this fall, corn, wheat, and soybeans are still about 70% to 80% below their inflation-adjusted highs in 1980-1981. That means a doubling in values is not only possible, but highly likely amid a growing shortage of wheat in 2008 and possibly, soybeans.

The US Department of Agriculture reports food prices this year are soaring, rising [at] twice the rate of inflation-the highest annual increase since 1990 at 4.8% annualized.

Soybeans, currently trading at $11.96 per bushel, are just 7.3% off their July 1973 all-time highs-before adjusting for inflation over the same period. Wheat prices, at $9.41 per bushel, now trade at an all-time high as supplies go from bad to absolutely near-desperate.

The London-based International Grains Council last week pegged 2007-2008 world wheat ending stocks at their lowest levels since 1979-1980. And the USDA recently claimed world wheat ending stocks, or surplus, at 110.1 million metric tons, a 30-year low.

Everything from corn oil to taco shells is witnessing higher prices. In some countries, like Mexico, which feeds on corn as a daily staple, riots are becoming more commonplace as citizens grow frustrated with numerous price hikes.

The iPath Dow Jones AIG Agriculture Total Return Sub-Index ETN (NYSE: JJA) holds a basket of commodity futures and trades like a stock. [It] includes the grains at 66% PLUS soybean oil at 9.9%, cotton at 9.3%, coffee at 8% and sugar at 7%. So in addition to the grains, you're also getting another 34% exposure in agricultural commodities-all of which should also enjoy big gains over the next few years!

This is an [exchange traded] note and trades like a stock. The only money you can lose is the amount you risk or invest. Effective immediately, buy JJAat market up to $60. (It closed Monday below $58-Editor.)

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