Alan's Finance Blog

The Great Grain Bonanza

Dear Sovereign Investor,

I attended a banquet in Beijing in 1989, not long after the Tiananmen Square massacre. It was a strange time to be in China. A senior government official at my table denied the massacre had even taken place.

As the subject switched quickly to economics, he also told me of his government’s multi-decade plan for slow growth.

Well, that wasn’t very accurate either.

Growth – yes; slow – not even close.

Chinese economic growth has surpassed the wildest dreams – and fears – of the west. But as China’s global power has expanded, so too has their dinner-table sophistication and the investment opportunity…

Even back then, I knew China was the demand side of the equation in the commodities markets. Today, the Chinese are driving automobiles instead of riding bicycles. They are using computers. They are drinking fine wines.

The Chinese have also changed their diet from basic rice to more complex grains and animal proteins. This dietary transformation lies at the very heart of a very profitable opportunity.

As Chinese Wealth Grows, the
Price of Grain Rockets

In 2001, China joined the World Trade Organization. Since then, the slow and steady march of the Chinese economy has turbo-charged the price of grain. The following chart shows how price in the key grain markets of soybeans, corn and wheat has skyrocketed since 2001:

China’s Energy Demand is
Part of the Equation

Global demand for crude oil has increased by 1% over the past quarter alone. Yet at the same time, the U.S. Energy Information Administration (EIA) reported earlier this month that China’s oil consumption during the same period increased by 4.6% to 10.24 million barrels per day.

The contrast between the demand for oil in fast-growing China and demand in the rest of world is obvious. But why is this important for grains? Well, it turns out that as prices for crude oil increase, demand for biofuels such as ethanol and fuels made from other grains also increases.

And therein lays the logic of another profitable vertex – as China’s thirst for fuel increases, so too does the price of both grain and oil.

Further Reasons for the Long-Term
Surge in Grain Prices

There are further reasons for the long-term surge in the price of grain…

An Appetite that will Drive Prices Higher: In 2008 droughts, floods and other climate events caused grain prices to soar as crop yields decreased. But based on projected consumption of grains in China, even in a perfect crop year where soybean, corn and wheat yields are at a peak, rising demand from China will support even higher price levels.

The World’s Top Grain Importer in Less Than a Decade: China is fast becoming the world’s largest importer of agricultural products, and within the next five to 10 years it will be there.

Thanks to the fact that China’s per capita farm land is less than 40% of the world’s average, the mass importation of soybeans is inevitable.

Demand Keeps Rising: Earlier this year, China used up her strategic stockpiles of soybeans as the price of edible oil skyrocketed. The country supported local manufacturers of edible oils by supplying soybeans from stocks bought at lower prices. China then showed up as a buyer of soybeans when the market moved lower during the third quarter.

The Chinese still have an appetite to replace their strategic stockpile.
China has also become a net importer of corn this year after 14 years of self-sufficiency. The domestic demand for animal protein has increased China’s demand for corn.

Loving U.S. dollar is Also Pushing Prices Up: The long-term bear market in the U.S. dollar has also contributed to higher commodity prices across the board. Grain prices have moved higher because of the falling greenback.

China is competing for finite stocks of food-stuffs: China last year imported 54.8 million metric tons of soybeans – some 80% of its domestic consumption. As the Chinese include more meat in their diets, the country has become a key player in the global corn trade. Current projections are that China will import five million tons of corn this year. It is already the top importer of soybeans and cotton and a major importer of sugar.

The Bottom Line

China has undergone dramatic changes since 1989. Today it is an advanced nation with advanced desires and appetites, and there is only so much land on the globe suitable for growing staples.

We have only seen the beginning of a rally in the grain markets. The increasing sophistication of the Chinese appetite has created an environment for grains to continue to move higher. And you should expect much higher prices in the years to come.

Shares in food processing companies such as Archer Daniels Midland (ADM) and Bunge (BG) are poised to rise. These are a good way to play the bull market in grains. And, for the more adventurous, the grain futures markets offer investors the opportunity to buy futures and options.

Make sure that you include long-term exposure to grains in your investment portfolio!

Happy trade hunting…

Andy Hecht
Editor, Trade Hunter & Commodity Trend Alert

Commodity Prices Generally Lower Ahead of Non-farm Payrolls

World markets generally head lower ahead of release of US non-farm payrolls. WTI crude oil slides for a 3rd consecutive day as investors worry that poor employment data may signal delay in economic recovery. Currently trading at 75.7, the benchmark contract in crude oil has moved towards the lower end of recent trading range of 72-82.

Consensus forecast non-farm payrolls in the US fell -114K in November following a huge drop of -190K in the previous month. Unemployment rate probably stayed at 10.2%. Most of market participants believed that October’s decline in payrolls was somehow too much and pullback this month is justified. Moreover, apart from positive jobless claims data released in recent weeks, seasonal adjustment might have also driven payrolls higher.

That said, an improvement is not certain. In fact, readings of some employment surveys were mixed. ISM manufacturing declined from its recent peak of 55.7 in October to 53.6 in November but employment component stayed above 50 for the second consecutive week. However, the major concern came from the services sector. Released Thursday, ISM non-manufacturing index slipped back into contraction territory and the employment component, at 41.6, remained poor.

Gold price also retreats after surging for 5 days and making a fresh high of 1227.5. Near-term overbought condition and broad-based decline in the commodity sector trigger the selloff. The benchmark contract currently trades at 1207 after sliding to 1201.4.

Stock markets also move lower. In Asia, the MSCI Asia Pacific Index lost -0.3%. In Australia, the S&P/ASX 200 Index dropped -1.5% which the NZX 50 Index in New Zealand slid -0.2%. In Japan, the Nikkei 225 Stock Average gained +0.5% as Prime Minister Yukio Hatoyama is expected to announce some new stimulus measures today.

In European morning, UK’s FTSE 100 Index slides -0.65 to 5279. Shares in Germany and France also plunge with both of DAX and CAC 40 Indices falling -0.5%.

This Commodity is Poised to Outshine Gold

Gold has been grabbing all the headlines lately as the price for the precious metal has hit record highs.

In the weeks and months to come, however, you’re going to be hearing about a far more pedestrian commodity: Rice.

The price of rice has started to climb based on reports that both India and the Philippines are looking to import record quantities. India lost 18% of its rice crop to drought this year. For the first time in more than 20 years, it may have to become a net importer of rice.

While drought plagued India, the Philippines had the opposite problem: Too much rain. The country lost an estimated 1.3 million metric tons of rice — at least 8% of the domestic supply for this rice-importing nation — in a series of strong typhoons that hit the region during the past three months.

Along with most commodities, rice hit record prices last year, with the futures markets hitting a peak of $25.07 per 100 pounds in April. And, also like most commodities, the price of rice tumbled as the global recession unfolded. But even though the price of almost every other commodity has been rebounding, boosted by a weaker U.S. dollar, the price of rice has been flat-lining at $13.50.

Until recently.

In the past few weeks, India and the Philippines started to buy rice in the world market. Rice futures have started to climb as a result, up roughly +15% in the past three weeks.

Some analysts have argued that the price of rice could double from here. Others argue that this year’s healthier crops produced stockpiles in Thailand and Vietnam that could help mitigate at least part of any price increase. But one of the biggest unknowns going into a period of potentially higher rice prices…

… is panic.

Last year’s record rice prices started a wave of civil unrest. Rice prices also started panic-driven hoarding. Bulk retailers like Wal-Mart’s (NYSE: WMT) Sam’s Club and Costco (Nasdaq: COST) began rationing rice in an attempt to keep it on their shelves. If the market starts to catch even a whiff of panic in the air, the price of rice could skyrocket.

Unless you dabble in the futures market, there’s no real pure rice play for American investors. When rice hit record prices last year, investors wondered why there was no rice-based exchange-traded fund (ETF). More than a year later, they are still wondering why one of the world’s largest crops still lacks an investment vehicle of its own.

Some investors are using general agriculture ETFs like PowerShares DB Agriculture (NYSE: DBA) and iPath DJ-AIG Agriculture Sub-Index (NYSE: JJA) as proxies for rice. But neither of these funds has an interest in rice. Elements/Rogers International Commodity Agriculture (NYSE: RJA) is one of the only funds that does have rice as a holding, but only a meager 1.43% of the portfolio. Still, it’s more rice than you’ll find in any other exchange-traded product.

But I find myself thinking back to when crude oil prices were coming off their lows.

Instead of consumers hoarding oil, we had cases of institutional hoarding. Speculators and investment houses started buying up oil on the cheap and storing it, hoping to sell it for a higher price in the future. If this starts to happen with rice, a company with grain storage capacity, like Archer Daniels Midland (NYSE: ADM) may be the beneficiary.

ADM has rebounded +44.2% in the last year, although it’s still -33% off its April 2008 high. And with a forward P/E of roughly 11.5 and a PEG ratio less than 1.2, ADM may be a better value bet on rising rice prices than any of the alternatives.

Amy Calistri
Editor
StreetAuthority’s Stock of the Month

Industry Estimates Showed Huge Decline in Crude Inventory

Crude oil price climbed higher yesterday after the American Petroleum Institute reported huge decline in crude inventory last week. The benchmark contract added +0.3% to close 79.14. In Asian session today, price continues to edge higher but upside momentum decreases as price moves closer to 80.

According to the industry-sponsored API, crude oil inventory drew -4.37 mmb to 333.1 mmb in the week ended November 13. The decline was significantly more market expectation of a drop of -2.2 mmb because attack of Hurricane Ida during the week caused shutdown of 43% of oil production facilities in the Gulf of Mexico. Gasoline stockpile was down -0.93 mmb, compared with consensus of -0.5 mmb, to 210.5 mmb as imports reduced. The disappointment came again from distillate stockpile which rose -0.51 mmb during the week as imports increased while demand slid.

The US Energy Department will deliver its weekly report in US session today. Crude inventory probably climbed +0.3 mmb. Gasoline and distillate stockpiles are anticipated to have dropped -0.025 mmb and -0.85 mmb, respectively.

Speculations on central bank buying and weakness in USD continue to drive investor crazy for gold. After mild consolidation Tuesday (closed at 1139.4, +0%), the yellow metal extends to a fresh record high at 1144.7 in Asian morning today.

The IMF’s sales of gold to the Reserve Bank of India and the central bank of Mauritius signaled more central banks will step up gold purchases. This phenomenon is positive for gold.

USD recovered modestly against major currencies as stock markets eased after US’ inflation, industrial production and housing data missed expectations. The dollar index gained +0.6% yesterday. The US Labor Department reported that PPI rose +0.3% mom while core PPI contracted -0.6% mom in October. Both readings were weaker than market expectations. Industrial production grew +0.1% mom in October while the market had anticipated a +0.4% increase. Worse still, September’s reading was revised down to +0.6%. NAHB housing market index stayed flat at 17 in November, contrary to consensus of an improvement to 19.

If economic data in the US continue to be disappointing, this should lead to weakness in USD in the long-term. Subdued inflationary pressure will allow the Fed to maintain its accommodative monetary policy for a long time.

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Crude Breaks Above 80 Again As Investors Speculate Pleasant Surprise from Energy Department

Crude oil rises above 80 (intra-day high: 80.23) in European morning. Investors are awaiting the EIA’s inventory report. As the market anticipates modest build in crude oil inventory, a surprising draw could trigger strong buying which may push price above the said intra-day high. However, we doubt if the rally will be sustainable as the inventory draw was to a large extend driven by hurricane Ida, rather than recovery in demand.

Gold extends rally to 1149.5 in European morning as the dollar resumes weakness. USD plummets -0.07% to 1.497 against the Euro ahead of US housing start and CPI data. Investors stay bearish on USD despite ECB President Trichet’s strong-dollar speech. Trichet said yesterday that a strong dollar is in the world’s best interest. Moreover, he denied the euro will be replacing USD as the dominant reserve currency. ‘The euro wasn’t created to compete with the dollar or to be a substitute to the dollar as a reserve currency…The ECB isn’t campaigning for the international use of the euro’.

US CPI probably rose +0.2% mom for the second consecutive month in October as driven by increase in energy prices. However, core CPI should have slowed to +0.1% mom in October from +0.2% a month ago. The soft reading in core CPI was due to weakness in the ‘rent and owners’ equivalent rent’ component. Housing starts are expected to have increased to 599 K units in October from 590K units a month ago.

The Bank of England minutes for November’s meeting revealed that while all members voted for maintaining the policy rate at 0.5%, there were splits regarding adjustment in the asset buying program. Out of the 9 MPC members, 7 favored extending the program by 25B pound. However, Chief Economist Spencer Dale preferred no change while David Miles favored a 40B-pound expansion. According to the minutes, Dale said that ‘further substantial injections of liquidity might result in unwarranted increases in some asset prices that could prove costly to rectify, complicating the task of meeting the inflation target in future’. Miles suggested a bigger expansion because it could ‘provide greater insurance against the downside risks to growth and inflation arising from constrained credit supply. That would maintain a similar rate of purchases as had been the case in the previous three months, once the intended break in the purchase program at the end of December was taken into account’.

Stocks in Europe advance as driven by rallies in commodity shares. In the UK, the FTSE 100 index climbs +0.4% to 5366. Germany’s DAX and France’s CAC 40 surge +0.7% and 0.6% to 5820 and 3583 respectively. Spurred by strength in oil price, BP and Shell adds +0.7% each. Mining shares, Xstrata and BHP Billiton, soar +3% and +2% respectively.

Earlier in Asian session, stocks plunged as investors concerned about capital-raising and share-issuance activities in banking and property sectors. While the MSCI Asia Pacific Index made little change in the day, Japan’s Nikkei 225 Stock Average slid -0.6% to 9677 after developer Tokyo Tatemono announced a plan to sell 45.6B yen in shares, the stock slumped -17%.

Source: Oil’n'Gold

Dow Jones Commodity Index Fund Trading Opportunity

Dow Jones Commodity Index Fund – This index tracks the entire commodity market as a whole. Over the past two years we have seen commodities drop in value substantially. The good news is that we could be seeing prices rise going forward from here.

2009 has been a fantastic year for trading commodities with the market bottoming and starting to move higher. This commodity index clearly shows a Cup & Handle pattern and is looking ready to breakout in the coming weeks. The C & H pattern is the best chart formation we could get. Breakouts from these patterns generally provide a rally which can last months at a time.

Let’s take a look at what kind of opportunity looks to be just around the corner.

Dow Jones Commodity Index Chart – Weekly

Commodities appear to have bottomed and are getting squeezed into the apex of the bullish wedge. This index could easily rally to the 180 level which is about 35-40% Gain.

DJP iPath Commodity Index Fund – Weekly

After reviewing several different commodity index funds I like the characteristics for DJP the most. There is enough volume traded which makes for a smooth trading fund on an intraday basis when looking at the 10 minute chart. Several other funds were choppy and thinly traded.

This is Exciting – Everyone knows how most commodity funds vary from the underlying commodity price, well this fund trades identical to the index. What does this mean? It means we can trade the DJP commodity index fund for short term and long term positions because there isn’t any price decay over time.

Performance Chart of Commodity Index & Fund

This chart goes back almost 2 years. As you can see the % change for the index and the fund are virtually identical. We do not need to worry about Contango with this fund.

Major Commodities Breaking Out or Bottoming

Gold, Crude Oil and Natural Gas are highly traded commodities and will play a large role in the direction of the commodity index.

Gold is breaking out to a new high – Bullish

Crude Oil is consolidating in a bullish wedge – Bullish

Natural Gas is trying to bottom and should move higher into the winter – Bullish

Dow Jones Commodity Index Trading Conclusion:

Money has been moving into the commodity sector since March of this year. As a technical trader this opportunity jumps out at me. I wanted to share it with fellow traders because this could be once of the easiest trades of the year if the index breaks out in the coming weeks.

Crude Oil Daily Technical Outlook

Nymex Crude Oil (CL)

Crude oil’s rally extends further today and the break of 73.16 resistance indicates that fall from 75.0 has completed at 65.05 already. The corrective three wave structure in turn argue that crude oil’s medium term rally is not completed at. Intraday bias is on the upside for retesting 75.0 first. Break will target 38.2% of 147.27 to 33.2 at 76.77 next. on the downside, below 72.18 minor support will turn intraday outlook neutral and bring consolidation first.

In the bigger picture, the break of 73.16 resistance favor the case that rise from 33.2 is still in progress for another high above 75.0. Nevertheless, strong resistance should be seen in 76.77/90.24 fibo resistance zone (38.2% and 50% retracement of 147.27 to 33.2) to conclude the medium term rise finally. On the downside, in case of pull back, break of 65.05 is needed to revive the case that crude oil has topped out. Otherwise, further rise is still in favor.

Nymex Crude Oil Continuous Contract 4 Hours Chart

Nymex Crude Oil Continuous Contract Daily Chart

Natural Gas Daily Technical Outlook

Nymex Natural Gas (NG)

Intraday bias in Natural Gas remains neutral for the moment and some more consolidation might be seen. Nevertheless short term outlook will remain bullish as long as 4.351 minor support holds. Above 5.120 will bring resumption of whole rise form 2.409 and should target 38.2% retracement of 13.64 to 2.409 at 6.7 next. However, considering bearish divergence condition in 4 hours MACD, break of 4.351 will indicate that a short term top is formed and will bring deeper pull back instead.

In the bigger picture, medium term fall from 13.69 is treated as part of the long term consolidation pattern that started at 15.78 back in 2005. The whole consolidation might have completed at 2.409 after meeting 100% projection of 15.78 to 4.593 from 13.69 at 2.50. We’ll prefer the bullish case as long 55 days EMA (now at 3.842 holds) and expect the current rise from 2.409 to extend further to 61.8% retracement of 13.64 to 2.409 at 9.38 in medium term.

Nymex Natural Gas Continuous Contract 4 Hours Chart

Nymex Natural Gas Continuous Contract Daily Chart

Crude Oil Daily Technical Outlook

Nymex Crude Oil (CL)

Crude oil edged higher to 72.55 but upside momentum remains unconvincing. Nevertheless, another rise is still mildly in favor with 68.16 support intact. Break of 73.16 will indicate that fall from 75.0 has completed at 65.05 already. The corrective structure will in turn indicate that medium term rally is still in progress for another high above 75.0 before completion. On the downside, below 68.16 will suggest that rebound from 65.05 has completed and will flip intraday bias back to the downside. Break of 65.05 will reaffirm the original bearish view that crude oil has topped out at 75.0 already and will bring fall resumption towards 58.32 key support next.

In the bigger picture, the lack of follow through selling so far dampens the bearish view that crude oil’s medium term rise from 33.2 has completed at 75.0. Nevertheless, risk remains on the downside as long as 73.16 resistance holds. A break below 65.05 support will solidify the case the crude oil has topped out in medium term again. In such case, deeper fall should be seen to test on 58.32 cluster support (38.2% retracement of 33.2 to 75.0 at 59.03) first and break will target a retest of 33.2 low. However, a break of 75.0 will indicate that rise from 33.2 has resumed for 76.77/90.24 fibo resistance zone (38.2% and 50% retracement of 147.27 to 33.2) instead.

Nymex Crude Oil Continuous Contract 4 Hours Chart

Nymex Crude Oil Continuous Contract Daily Chart

Natural Gas Daily Technical Outlook

Nymex Natural Gas (NG)

No change in natural gas’ outlook so far. While some more sideway trading might be seen, further rise is expected with 4.351 minor support intact. Current rebound from 2.409 is still in favor to extend further to 38.2% retracement of 13.64 to 2.409 at 6.7 next. However, considering mild bearish divergence condition in 4 hours MACD, break of 4.351 will indicate that a short term top is formed and bring longer consolidations before resuming the rise from 2.409.

In the bigger picture, medium term fall from 13.69 is treated as part of the long term consolidation pattern that started at 15.78 back in 2005. The whole consolidation might have completed at 2.409 after meeting 100% projection of 15.78 to 4.593 from 13.69 at 2.50. We’re looking at the prospect of medium term rise to 61.8% retracement of 13.64 to 2.409 at 9.38 in medium term.

Nymex Natural Gas Continuous Contract 4 Hours Chart

Nymex Natural Gas Continuous Contract Daily Chart