Grains Are Ready for Their Close-Up

08/03/2010 11:03 am EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says grains have lagged other commodities, but bad weather and seasonal strength have caused a price breakout.

With the exception of livestock and lean hogs, one component of the commodities universe remains exceptionally cheap (even adjusted for inflation) since peaking in 1980-1981.

I’m talking about the grains. Things like wheat, soybeans, corn, oats, and barley are all down more than 75% adjusted for inflation over the past 30 years.

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.

[Now,] a major breakout is under way in the distressed grain sector.

Corn, wheat, and soybeans—pounded [after] record harvests in many countries—are now on an up trend following lower-than-expected US yields this growing season and adverse weather in important growing regions.

Falling water supplies, booming demographics, the 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.

[Meanwhile,] 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 corn and wheat.

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

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

The period from August 1st to December 31st is [seasonally strong] for agricultural stocks. The seasonal trade has been a winning ride for investors in 12 out of the past 15 years, for an average gain of 16.3%, compared to 2.5% for the Standard & Poor’s 500 Index.

[The] iPath Dow Jones-UBS Grains Total Return Sub-Index ETN (NYSEArca: JJG) is down more than 51% from its all-time high in June 2008, and is now bottoming.

JJG holds 42.9% in soybeans, 34.6% in corn, and 22.5% in wheat. The fundamentals currently look best for corn and wheat.

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

But hot, dry weather is now engulfing great parts of the country—the US 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.

Wheat prices have risen 18% in two weeks—they surged to a six-month high last Friday, as the hottest weather in more than a decade threatens crops in Europe.

Important wheat growing regions across Europe and the former Soviet Union are now threatened by severe weather.

This ETN is thinly traded, but it represents the only pure grain index for investors. (It closed at around $40 Monday—Editor.)

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