Commodity ETF Alert March 2009 Issue

It was during a time of tremendous economic and political turmoil.  Shops had stopped selling a basic necessity – bread.

People were starving and the working class was on the verge of revolt.

The story was relayed to Queen Marie Antoinette… and she famously quipped back, “If they have no bread to eat, let them eat cake.”  (Though, I’m pretty sure she said it in French.)

Clearly, Marie didn’t realize the importance of the situation, or the importance grains hold in feeding the world.

Wheat is one of the most common and widely grown grains in the world.  Almost every country grows some form of this grain.  And, it’s a significant source of nourishment in many poor countries.

Wheat isn’t the only grain to be widely used.

Corn and soybeans are also major staples.  When it comes to foods consumed around the globe, these are the big three.

Some countries are better than others at producing the three main grains.  Those without land mass or farming technology must import grains to meet part of their demand.

This sets the stage for our next trade.

As you know, farming can be a risky endeavor.  Plant your crops too early and you can experience frost damage.  (Pesky late season frosts are hard to forecast).  Delay planting for a few weeks and your harvest will be late.

Remember, these grains, especially corn and soybeans are often interchangeable from the view of the farmer.  This leads to thousands of farmers playing a game of chicken with their crops.  They’re gambling on which crop will bring the biggest payday.  Some hold off making the corn vs. beans decision till the last possible moment.

All of this uncertainty creates volatility – and higher prices – in the grains markets.

Add the indecision to major environmental factors like weather and bug infestations, and we have an opportunity for prices to jump.

Now, seasonal trends in commodities are not unusual.  Often, for corn, the big time of the year is May and June.  Wheat sees strength toward the end of summer.  Soybeans, like corn, traditionally build going into the end of July.

All of this fundamental insight points to grain prices heading higher.  Not only because of seasonal changes, but also fundamental supply risks.  Before we get to the trade, let’s look a little more closely at the big three Grains.

Corn

Major growers of corn include the United States, China, Brazil, and Mexico.  Corn is used for human consumption, feeding livestock, and producing of ethanol.  The last use – ethanol – can lead to some big volatility in the markets.

Soybeans

Soybeans are grown widely in the United States, Brazil, Argentina, and China. Argentina is quite disruptive to the global bean supply.  Government taxes on farmers are reducing supply on the world markets.  If we see more conflict this year, bean prices could skyrocket.

Beans are used in, well, everything.  Beans can be a simple food product or processed into oil and meal.  End products include soaps, cosmetics, inks, solvents, and even biodiesel fuel.

Wheat

Wheat grows easily in a variety of climates.  That’s why it’s one of the most widely grown food crops.  Major producers are the European Union, China, India, and the United States.  Interestingly enough, the top exporters of wheat are the US, Australia, Canada, and France.  (Who’d have thought?!?!)  China is often a major importer.

ABOUT GRAINS

So, I’m sure you’re wondering why I keep talking about three different commodities. The answer is simple.  I’ve found a way we can profit on all three commodities with one purchase.

For this commodity trade, I want to use the iPath Dow Jones–AIG Grains ETN (JJG).
Basically, the fund tracks the combined performance of three main grains: corn, wheat, and soybeans.

JJG trades for about $36.01.  Remember, because of tracking errors and expenses, the actual value of the ETF might be slightly different than the underlying commodities. It’s not a cause for concern, but important to point out.

TECHNICALLY SPEAKING

The grains are down since the early part of the year.  It looks like they found support last week around the $34 level.  If we can cross above the $37 level (where the 20-day moving average is now holding), we might see a new uptrend begin.  The 50-day moving average has stabilized and is now moving sideways.

Clearly this is a bottom call.  I believe we’re at or near a major inflection point.  Price looks to be hitting a floor right as we enter planting season.  Fundamentally, grains should move higher.  We’re at a low risk entry point.  Since we’re looking for a seasonal move, our timeframe on the trade is just a few short months.

 

The iPath Dow Jones–AIG Grains ETN (JJG) is trading at $36.01.
Buy JJG up to $38.00 per share.
Our Profit Target is $46.00.
Don’t forget your position sizing.

ENERGY COMMODITIES

Last month the energy complex dropped more than 12%.  The bulk of the drop is due to oil prices shifting lower.  Our trade from last month, the iPath S&P GSCI Crude Oil Total Return ETN (OIL), trended lower for most of the month before bouncing higher recently.  This is still a good trade.  And, everyone should have established a position at some great prices.

Two things account for the recent bounce in prices.  News US oil inventories fell for the first time since December and the belief OPEC is actually following their prescribed supply cuts.  Gasoline prices are stabilizing as demand is reappearing in the markets.

On a technical basis, JJE is getting more bullish.  We’ve traded above the 20-day moving average for a few days now.  I’ll feel more confident when the averages turn higher.

Now, the oil markets are acting strangely.  Some investors are questioning the use of WTI (West Texas Intermediate Crude) as a viable oil pricing benchmark.  This is the price of oil widely quoted in the news.

Simply, storage problems in Oklahoma and differences in prices with European supply points is raising serious questions.  Platts is going to launch a new oil benchmark taking a basket approach with four other delivery types.  It won’t have much impact on our trading, but an interesting data point nonetheless.

Natural Gas prices are holding steady.  It looks like the really cold winter never materialized.  Milder temperatures are keeping a lid on demand.  As a result, major suppliers like Chesapeake Energy are cutting back spending plans.

GRAIN COMMODITIES

Grains were the second biggest losing commodity complex last month.  In all, we had a 10% decline across the board.  This is good news as it sets the stage for a strong rally going into the planting season.  This month’s trade focuses on buying the iPath Dow Jones–AIG Grains ETF (JJG).

In global production news, soybeans sidestepped problems in South America.  A long dry stretch recently ended.  The news of rainfall stabilized prices.

INDUSTRIAL METALS

Industrial Metals fell 4% in February.  The fear of a deepening economic recession is expected to dampen demand for the metals complex.  The technicals are showing an upturn in the 50-day moving average.  In addition, we’re seeing a moving average crossover to the upside.  Strange, as the fundamental data is indicating we should be moving lower… not higher.

Copper demand is continuing to fall as the economic recession worsens.

PRECIOUS METALS

For the second month in a row, the big winner in commodities is Precious Metals. Clearly the threat of horrible economic data is boosting the complex.

Wow!  What a run we’ve seen in our gold trade.  This month IAU traded above our target price reaching $99.06… a gain of more than 17.9%.  Everyone should have exited the position for a very nice gain.

The Journal ran a big article on institutional investors moving into gold because of inflation fears.  (Sound familiar?)  Some of the big buyers are John Paulson (he made $15 billion betting against subprime mortgages) and Blue Ridge Capital.

Technically, the chart on Precious Metals is giving me pause.  We had a moving average crossover to the downside… but all the major longer term averages are still heading higher.  I’m thinking this is a short term counter trend or consolidation pattern.  Just something to keep our eye on.

The recent run-up in gold prices has been a big boon to gold producers including Newmont Mining.  Newmont plans to sell between 5.2 and 5.5 million ounces of gold this year.

SOFTS

This was a tough month for the Softs.  We posted a 9% decline.  Technically, it’s not looking much better.  Despite the 50-day moving average being in an uptrend, the 5- and 20-day are both headed lower.

Cocoa prices spiked going into Valentine’s Day, then promptly fell off a cliff.  The last time we saw the commodity at these levels was early December 2008.

LIVESTOCK

Livestock lost 2% this month.  Remember, livestock faces a seasonal swing.  Winter’s always a seasonally low time for livestock supply.  Demand continues to fall in this tough economic environment.  Technical analysis is pointing to a further breakdown in the market with all the major moving averages pointing lower.

• This month we’re adding a position in the Grains.
• We exited the IAU trade for a gain of just under 18%… see the February portfolio update for more information.

Category: Commodity Trading