Friday, February 8, 2008

Wheat is the New Corn

We discussed Wheat Earlier this week [Wheat Goes Above $10 a Barrel]. $10? Now its nearly $11, and if not for the daily limits (it is only allowed to go up so much each day) it would be over....

Wheat Rises Exchange Limit to Records as Inventories Decline
  • Wheat rose to a record for a third day on the Chicago Board of Trade, gaining the maximum permitted by the exchange, as the U.S. forecast its lowest inventories in 60 years and global demand outpaced production.
  • The U.S. will hold 272 million bushels at the end of May, the lowest since 1948 and 6.8 percent less than expected a month ago, the Department of Agriculture said in a report today. Inventories in the U.S., the world's biggest wheat exporter, will drop 40 percent from a year earlier. Wheat futures have more than doubled in the past year as supplies dwindled.
  • Wheat futures for March delivery rose 30 cents, or 2.8 percent, to a record $10.93 a bushel at 9:54 a.m. on the Chicago Board of Trade. The contract has risen the 30-cent exchange limit for five straight days. The 16 percent gain this week would be the biggest in history.
  • U.S. yields were curbed by a freeze, followed by excessive rainfall, and then drought hurt production in Canada and Australia. Global buyers increased purchases of supplies on speculation farmers wouldn't harvest enough to meet needs and to curb rising food costs.
  • Wheat was the fourth-biggest U.S. crop in 2006, valued at $7.7 billion, behind corn, soybeans and hay, government data show.
This is part of the very awful cycle I've been talking about since last summer. Take out all the issues about weather, droughts, climate change, whatever. The simple fact is new farmland is not being brought online at a very quick pace. Crop yields are increasing but not nearly enough to support demand. So as our US government (by incentivizing corn ethanol) pushes more of our crop lands into this stupid foray, every other crop will suffer. So production falls, inventories fall, and prices rise. This is why I think ANY crop out there... ANY is a buy. Cotton, sugar, coffee, anything.

But again folks, we won the hearts and minds of the farmer vote so there is always a silver lining. Also thankfully inflation is "contained and benign".... so nothing to worry about.

Last, all this Fed liquidity has to go somewhere. Money never goes to the last bubble so it won't be real estate. My guesses have been commodities and/or foreign markets for Fed inspired Bubble 3.0. So aside from all the basic ECONOMIC reasons, the Fed induced bubble reasons are yet another reason. All these hedge fund computers lapping up subprime infected financials and home builder stocks are surely chasing these commodities up. If not for the lock limits each day, I truly wonder how high these crop prices would be.

AGAIN, DON'T WORRY! Inflation is contained. I'm just saying if it were not... it is something to think about.

I added a bit more to my Powershares DB Agriculture Fund (DBA), which again I am using as my safety valve and "money market" in this environment. I am awaiting any and all ETFs the market brings which allow me to buy any specific crops. Thank you Washington DC for making quite possibly the most easy investing thesis in my lifetime.

The way things are going, within a decade farmland is going to have more value than ocean front property.

Long Powershares DB Agriculture Fund in fund and personal account

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