Soybeans Soar to Record, Grains Rally as Demand Erodes Supply
January 14th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Corn, wheat and soybeans were all limit up on Friday.
I almost fell out of my chair when I saw the one day gain on PowerShares DB Agriculture (DBA). It was up 5.65% at $36.45. You may remember that I put out my first bullish call on DBA when it was trading around $27 back on September 18th of last year.
And here was my assessment for 2008 on food:
In 2008, food could become a out front national security issue in the developed world. My top concerns are wheat and corn. For hundreds of millions of people, especially in America and Europe, this will translate into higher food costs across the board.
I want to take a look at DBA from a technical perspective, especially after Friday’s close.
PowerShares DB Agriculture (DBA)
I think I’m going to have to stick with it. I see strength piling on top of strength here. Although RSI and stochastics are extremely overbought, the break up and out of the channel trumps the other indicators for me. The channel breakout was also a new 52 week high on five times the three month average volume.
With RSI and stochastics so extreme for so long, I will look at buying protective February put options just in case the thing unwinds violently; a real possibility. If it comes down, I’ll pocket some winnings on the put options without having to exit my main position. I’d probably buy more on any pullback with supports in tact.
Now, note the comments of the trader in the Bloomberg piece below:
“We can’t grow our way out of this grain-shortage hole,” said Jim Gerlach, president of A/C Trading Inc. in Fowler, Indiana. “We’ll have to price our way out. I’m bullish until further notice. We’ll see ups and downs, but the trend will remain higher.”
“We’ll have to price our way out.”
Did you catch that?
The translation of, “We’ll have to price our way out,” is: A) People are going to starve to death because of this; and B) States with too many people facing starvation are going to have national security crises on their hands.
Via: Bloomberg:
Soybeans jumped to a record, corn reached an 11-year high and wheat rallied after U.S. government reports showed that production is failing to keep pace with rising global demand for food and biofuels.
The world soybean harvest will fall 6.5 percent this year, U.S. corn inventories will be 20 percent less than estimated a month ago, and wheat farmers in Kansas and Texas planted less even as the price of the grain doubled, the Department of Agriculture said in separate reports today.
Tighter supplies will boost the cost of feed for hog processor Smithfield Foods Inc. and poultry producer Pilgrim’s Pride Corp. General Mills Inc., the second-biggest U.S. cereal- maker, said today it raised the price of Pillsbury refrigerated dough to offset higher wheat costs. Globally, food prices have doubled on average in the past five years, UN data show.
“We can’t grow our way out of this grain-shortage hole,” said Jim Gerlach, president of A/C Trading Inc. in Fowler, Indiana. “We’ll have to price our way out. I’m bullish until further notice. We’ll see ups and downs, but the trend will remain higher.”
There’s also the RJA ETN, covering a broader basket of ag commodities.
Kevin –
I understand that you’re not in the blog biz to teach Investing 101, but if you could answer one quick question:
Since you shared your own investment/protection regimen with us, I have been educating myself on the basics of ETFs (individual stocks are *way* beyond me). I think I’m up to speed enough to test the waters with a few affordable experiments (ag & water, as suggested!), but my brain started smoking whenever my research got near options.
You say “With RSI and stochastics so extreme for so long, I will look at buying protective February put options just in case the thing unwinds violently; a real possibility.”
Since I know I’m in no position to ponder “protective February put options”… should I not be considering getting into anything right now??
If there’s any kind of violent unwinding coming down, I’d just as soon wait til that’s over with.
:/
Any info appreciated!
Karin H
Hi Karin,
In general, I’m very much a contrarian when looking to take on a position. It’s the old buy low, sell high. (Or short high, cover low., like my recent Apple play.)
Of course, this is not a recommendation to buy, sell or hold any financial instrument, but I would not chase DBA here. It gapped up again today.
At times like this, it’s a hard call. Will it melt up more, or crash? Both are real possibilities. My guess, and it’s just a guess, based on my squiggly lines and Magic 8 Ball studies, is that it’s going higher.
If you’re new to trading, I’d forget about options for a while. But here’s a bit of explanation in case you’re curious:
Using options to protect gains is an advanced move. In a nutshell, when you have good gains on something, but you suspect you might see even more gains, you might be willing to spend some money for what amounts to something like an insurance policy.
I would consider spending a tiny bit of capital on deep out of the money put options as a hedge. So I’m long the actual DBA shares with my investment capital, but I bet the other way on the put options with a tiny portion of my speculative capital.
Options are leveraged 100:1 so there’s a lot of bang for the buck. The catch is that they expire at pre determined times. To make a long story short, the closer the price of the underlying thing is to the strike price of the option, the more the option is worth. As the expiration date approaches, the price of the option declines.
Anyway, if DBA really melts up, I’ll just sell half, or three quarters of the position and then let the rest ride.