Eat Up This Commodities Trade

Food prices are going up--bad for your grocery bill, good for ag futures.

   

Food costs a lot. In fact, after the pernicious drought in 2012 (the worst in 50 years), consumers around the world are faced with the very real possibility of rising food prices.

I’ve seen some food industry observers speculate that higher food prices and food shortages could become the norm in 2013. At the same time, global populations continue to rise, as do the number of people in emerging market nations that are now finally able to afford better, more protein rich, diets.

This confluence of events could very well drive up feed stock prices, and that means a nice trading opportunity in a basket of commodities such as corn, soybeans and wheat.

On Friday, Jan. 11, agricultural commodities traders were treated to what turned out to be surprisingly bullish (for prices) grain data. The closely watched USDA quarterly stocks report on the World Agricultural Supply/Demand Estimates (WASDE) showed that so-called ending stocks, which is the amount of corn/soybeans in inventory after all of the year’s demand is accounted for, now is at the lowest level in well over a decade.

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This was somewhat surprising, but not for the reasons that most expected. Most industry watchers figured export demand for US grains would be depressed due to drought-driven higher prices. That was the case; however, it was domestic demand from US ranchers for feed that caused increased demand overall, and hence the decrease in ending stocks.

Reaction in the trading pits to this news was the bidding up of corn, soybeans and wheat, and that buying stymied the recent decline in the sector. The chart here of the PowerShares DB Agriculture (NYSE:DBA), a fund that holds a basket of futures contracts including corn, soybeans and wheat, shows the buying in the shares since Jan. 14. This buying has brought an end to the recent decline in sector values.

As you can see, since September there’s been a substantive correction in the grain and ag commodities markets, a correction that by mid-December sent the fund below its 200-day moving average. The price action over the past five trading days could be the beginning of a new leg higher in agricultural commodities, and that means a trading opportunity for those looking to play the sector.

I consider this a relatively low-risk trade, as shares have come down a lot over the past several months. If this is a trend higher, then we could see DBA rise at least another 10-15% off its current levels over the next two months. If the sector fails to mount a rally, and if it goes back into bear mode, then you’ll want to protect yourself with a stop-loss at about $26.

At the time of publication, Jim Woods did not own any of the stocks mentioned here.


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