Big Gains in Grains

Sean Brodrick

The agricultural sector is heating up again. Sugar is leading the way, but grains are doing well, too, on expectations of bigger imports in China and bad harvests in some of the world’s grain baskets. You can play this move and make a bet on sugar, soybeans, corn, wheat and more. And you don’t have to trade futures to do it.

I’m talking about the PowerShares DB Agriculture ETF, symbol DBA. It tracks a basket of futures — soybeans, corn, sugar, cocoa, coffee, cattle and hogs. Here’s a chart …

Weekly chart shows DBA has broken a downtrend and is a trending higher.

You can see that the DBA bottomed in June, then broke out of its downtrend. Now, it is stepping higher along its 20-day moving average and is trying to push through overhead resistance. If it does, I think it’s going back to $33 a share.

Here are some of the stories lighting a fire under agricultural commodities …

  • Chinese imports of corn alone may total 1.7 million tons this year and 5.8 million tons next year, according to the U.S. Grains Council. Imports of 5.8 million tons would surpass China’s previous record purchases in the 1990s.
  • Helping prices is a heat wave in Europe that is withering crops. European grain prices have jumped around 25% in the past three weeks as hot weather and drought have hit crops just before harvesting in Western and Eastern Europe.
  • Russia in particular is getting hard hit. The harvest may drop below 80 million metric tonnes, down from recent, already-lowered estimates of 85 million tonnes, and way down from the 93.5 million tonnes produced last year. That’s according to Russia’s economic ministry. Another Russian source, SovEcon, gives an estimate of below 70 million tonnes. It’s so bad, Russia may ban exports to keep prices from skyrocketing.

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  • Ukraine said it would likely cut its grain exports in the 2010/11 market year to 16 million tonnes, from 21.5 million in 2009/10. Kazakhstan, another grain exporter on the Black Sea, is also bracing for a bad harvest.
  • As for sugar, the International Sugar Organization says that global sugar demand will outstrip supplies by 8.5 million tonnes in the season.
  • And looking ahead, the Pacific Ocean is in the early stages of a La Niña weather system. If a La Niña develops, the southern U.S. will get warmer and drier weather in late summer. That should reduce yields for the maturing U.S. corn and soybean crops. The months of July and August are the most critical growing months for the U.S. corn and soybean crops.

One More Factor Bullish for Grains — A Weaker Dollar

The U.S. dollar’s on-again-off-again slump is on again. And that has big implications for the grain markets.

After a strong rally in the first part of the year, the U.S. Dollar Index is trending lower.

Why? Because since U.S. grains are priced in dollars, as the dollar falls, our grains become cheaper for foreign customers. When the dollar goes down, we sell more grain overseas. That means less grain in silos here at home, and that leads to higher prices.

And sure enough, every time in the past few years that the dollar has weakened, buying interest in commodities perks up — especially crude oil, but also agricultural commodities.

Add it all up and it’s a bullish outlook for the DBA. And you have other options as well …

  • If you have a stomach for risk, you can buy the DB Agriculture Double Long (DAG), which is, as it sounds, a double-leveraged bet on the components of the DBA.
  • If you think this agriculture rally is going to fizzle, you can use the DB Agriculture Short (ADZ) or DB Agriculture Double Short (AGA).

I should mention that leveraged funds can be as volatile as dynamite, and come back to bite you if you end up on the wrong side of the market.

And if you want to be more cautious, wait for the DBA to pull back to its 20-day moving average. You can check that with a chart I’ve posted on the Internet here: http://tinyurl.com/2do44w3.

All the best,

Sean

P.S. Remember, you can see my daily updates on my blog at http://blogs.uncommonwisdomdaily.com/red-hot-energy-and-gold/


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Your thoughts on “Big Gains in Grains”

  1. Oct 2

    Sean,

    Everything you said in your July 30 article about the prices of corn, wheat and sugar skyrocketing have come true; however, the price of DBA not gone up commensurately. In fact, it reached a high of $28.07 and has now dropped to $26.65.

    Should I be patient and hold on to my shares of DBA?

    Thanks.
    Mark

Comments are closed.

Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit.