Commodity ETF Alert February 2010 Issue

The morning cereal, check.  The sandwich at lunch, check.  The evening pizza, check.

Those are the obvious things…

How about the not so obvious?  Do you know how many other products involve corn ingredients in one form or another?

How about batteries, antibiotics, pharmaceuticals, beer, windshield washer fluid, ketchup, latex paint, aspirin, licorice, fiberglass insulation, shaving cream, the list goes on and on…

What about soybeans?

Not only do you get soymilk but you also get crayons, fabric conditioner, various floorings, hand cleaners, paint removers, pens, shampoos, solvents, etc…

But first and foremost, it’s these grains that keep the world fed. From rich to poor, people around the world rely on them.  And producing enough grain for the country and the world is a huge task.

Planting season is just around the corner…

Most of the country is still feeling winter’s wrath.  But farmers are already looking forward to spring…

The spring planting season for corn begins in March and early April.  Planting for soybeans begins in April and May.

We want to get in ahead of the game.  The markets normally build in a ‘risk premium’ for these commodities from March through June.  The premium accounts for uncertainty about the upcoming planting season.

Uncertainties like, what crops are farmers actually going to plant?  How many acres will farmers be planting?  And eventually, what kind of yields will farmers get?

The USDA releases its Prospective Planting report at the end of March of each year. This report is derived from a survey of farmers across the nation.

The most important part of this report is the number of acres farmers are expecting to plant.  With respect to each commodity, if the number comes in lower than analysts’ forecasts, the markets will rise.  If the number comes in higher, markets will fall.

It’s these uncertainties that build the risk premium.

Now is the time to buy the grains…

Just a few weeks ago the USDA released its Annual Crop Production Report for the 2009 grains harvest.  The numbers were no less than exceptional.

Record crops were reported for corn as well as soybeans.  Yields were much higher than in years past.  The total number of bushels of corn came in at 13.15 billion.  For soybeans, it came in at 3.36 billion bushels.  The 2009 harvest was a bumper crop…

The story is the same for wheat.  Wheat stocks (total supply) are nearly 25% higher compared to year ago levels.

The news is great for the food supply and a cause of congratulations for hard working farmers.  However, the news sent grain prices off a cliff.  The increased supply of both commodities sent prices downward.

That’s why now is the time to buy the grains…

With prices at lows and supply at record highs, the downside risk of buying grains is low.

Remember, the Prospective Planting report is just around the corner.  If farmers decide to put a smaller number of acres into production than expected, the prices of corn and soybeans will rise.

This is a seasonal grain trade…

Right now the price and technical analysis puts the risk of further downside in the grains at very low levels.  But the potential upside is much larger.

Remember, we’re looking for higher prices in grains due to seasonal factors mentioned above.

But we also have to throw in the uncertainty of the weather…

Obviously, weather plays a large role in when farmers can get into their fields to plant. Not only that, but the growing conditions through the summer play a big part as well.

We’re looking for all this uncertainty to push prices higher through the spring and into the summer.  By that time, we should be looking at a nice profit.

ABOUT GRAINS

We’re set up just right for rising prices in the iPath DJ AIG Grains ETN (JJG).  The JJG is an exchange traded note (ETN).  The price and movement of the ETN is based on an index tied to futures contracts in corn, soybeans, and wheat.

JJG trades for $35.79.  Remember, because of tracking errors and expenses, the actual value of the ETN might be slightly different than the underlying commodities. It’s not a cause for concern, but important to point out.

TECHNICALLY SPEAKING

Take a look at the chart…

We’re at a great entry point to build a long position.  As you can see, JJG is at yearly lows right now.  The green line you see in the chart is a price support level at the $35 area.

For prices to head lower from here, we would have to see extremely bearish news in the grains market.

But guess what… we’ve already seen that information in the recently released Annual Crop Production Report mentioned above.  This bearish information has already been priced into the markets.

 WHAT TO DO NOW:

The iPath DJ AIG Grains ETN (JJG) is trading at $35.79.
Buy JJG up to $37.00 per share.
Our Profit Target is $45.00
Don’t forget your position sizing.

ENERGY COMMODITIES

The rising dollar is wreaking havoc amongst commodities across the board.  The energy industry is seeing a sustained pullback in recent weeks.  The price of oil has come down from $82 a couple of weeks ago to its current price of just under $72.

So what’s going on with the dollar?

Fears in Europe of sovereign debt defaults (especially Greece) are causing quite a stir. The perceived risk is causing investors to flee the Euro as well as other riskier assets such as stocks.  This ‘flight to safety’ is causing a rally in the dollar.  Since commodities are priced in dollars, any strength in the dollar causes weakness in commodities.

Even though the dollar is doomed in the long term, it’s not in as bad of shape as other currencies (like the Euro) in the short term.  However, we suspect things will get worked out with Europe and the dollar will resume its downtrend.

Our trade in Crude Oil (OIL) is pulling back to support at the $23-$22 zone.  Crude oil is seasonally strong in late February and March, so hold on to this one.

However, our trade in GAZ is not working for us.  The problem is this… Nat. gas prices have risen just like we thought they would.  But GAZ has not.

The Natural Gas ETF we picked is not holding true to the price of the Nat. gas commodity.  Let’s not hang around to watch GAZ do nothing.  Close GAZ so our capital can be put to work in better opportunities.

GRAIN COMMODITIES

Grain prices have pulled back due to the factors we mentioned above.  Now is the time to pick up grains on the cheap.  Remember, we’re looking for rising prices as the planting season rolls around in late March.  Prices have come down to support and we really can’t see them heading much lower from here.

This is a great time to put on this trade!

INDUSTRIAL METALS

The industrial metals complex fell along with everything else last month.  Prices are coming down as fears about the global recovery are rising.  China also revealed last month it was tightening its monetary policy to control the growth of their economy. The news immediately weakened industrial metals.

Our Aluminum trade (JJU) has pulled back to support.  It should be able to hold this level. Keep holding as I’m still expecting Aluminum to strengthen in the future.

PRECIOUS METALS

In the short term, fears of inflation have been replaced with the fears out of Europe. Gold and silver have seen volatile pullbacks over recent weeks due to strength in the dollar.

But rest assured, we believe gold and silver are going higher in the long term.  We suspect both will test their recent highs within the next 6-8 months.  Keep holding both of our gold and silver trades…

SOFTS

The softs complex has seen a minor correction of just under 6%.  Both cocoa and sugar are pulling back but remain at elevated levels due to global supply concerns.

Coffee has seen a larger pullback.  Our trade in JO is going the wrong way.  Obviously, we’d like to see this one strengthen.  But we can’t ignore that JO is falling and we have to say uncle somewhere.  Let’s conserve capital and exit JO.

LIVESTOCK

The COW is still stuck in a rut.  What I mean is, the COW ETN is still trading sideways. Live cattle prices remain suppressed while lean hogs continue to strengthen.  The result is COW is stuck in a trading range.

• This month we’re adding Grains (JJG) to the portfolio.  See above for all the details.
• Sell Natural Gas (GAZ) to conserve capital.
• Sell Coffee (JO) to conserve capital.

Category: Commodity Trading