Tuesday, June 17, 2008

Bookkeeping: Replace Powershares DB Agriculture Fund (DBA) with Powershares DB Agriculture Double Long ETN (DAG)

I will edit this post later when I have more time but just want to quickly mention, following yesterday's thoughts on replacing Powershares DB Agriculture (DBA) with another instrument [Corn Rocks but We've been Frozen Out]; I've decided to go with what is essentially an Ultra long in the agriculture commodities - Powershares DB Agriculture Double Long (DAG). This is essentially the same index as DBA, but twice the return. (either up or down)

Since I will have a lot more volatility with this investment vehicle since it will exaggerate the moves of DBA by a factor of two, I have not bought as much of it since I get the same movement for half the exposure. [Apr 17: Four New Agriculture ETNs]

So I completely sold my 3.2% stake in DBA and am replacing it with a about 60% the exposure in DAG (about a 1.8% stake). I'd like to buy more on dips since its had a huge run of late, but we'll see how deep the dips are.

Folks, everyone is talking about crude oil - I do believe demand destruction from the developed countries and eventually developing countries as they cut back subsidies will help alleviate that into the 2nd half of 2008. A slowing globe will also do the trick. I do however now believe the food crisis which a few of us have been talking about for many many months, will be the story of the 2nd half of the year - recent weather in the Midwest took a very bad situation and took it to critical. I don't think Wall Street understands that yet. So replace "food" with "oil" and keep the same hysteria you are hearing everyday on TV and in the news going for another year. And realize people can demand destruct energy much easier than food.

I'll write more on this subject later but if you are new to the blog, just click on food crisis tag below and you'll see months of history on the subject. There is also a story in the Wall Street Journal today and as we all know, until the Wall Street Journal puts information in front of the traders they are usually oblivious to it. So I think awareness of this subject will be skyrocketing by later summer/early fall.

Last, stock up your freezer with what you can... as I've been saying for many months. You'll be paying a lot more in the future for everything. Even though there is little inflation in the United States (source: government)

EDIT - here are some news reports, highlighting what appears to be a coming emergency...
  • The flood tides enveloping the Midwest will crest across the nation in the form of higher prices in just the places where households have been hit the hardest -- food and fuel.
  • Floodwaters have spread across the Corn Belt, preventing farmers from planting soybeans and damaging a corn crop just starting to emerge from the ground. Analysts estimate that flooded Iowa and Illinois and the other corn states might produce 15% less of the grain than last year. Some believe the shortfall will be larger.
  • That pushed corn prices to near $8 a bushel Monday and sparked fears of another jump in food inflation. Already, the cost of food is increasing at its fastest pace in 18 years.
  • "This is a pretty big train wreck developing," said Steve Meyer of Paragon Economics in Adel, Iowa.
  • Corn is one of the economy's essential commodities. It feeds cattle and dairy cows, it's cooked into breakfast cereal, it sweetens soda pop and it creates ethanol. The developing shortage is expected only to increase competition for corn among farmers, food companies, ethanol refiners and exporters. (my favorite word, ahem - shortage)
  • For now, cattle ranchers, pork farmers, dairies and other food producers will take the largest hit, said Michael Swanson, a Wells Fargo & Co. agricultural economist. "We have record prices for hogs and for cattle, but these prices aren't going to be high enough for the farmers to make any money because the price of corn is so high," he said. (and so it begins...) Barring a sudden turnaround in the corn markets, shoppers should expect to see the price of meat rise as farmers reduce the size of their herds to save money on feed.
  • He said chicken prices would start to increase first, as poultry supplies tighten. That would be followed by pork and then beef. (I await, patiently... see COW)
  • Hog farmers in South Dakota are starting to liquidate their herds and get out of the business, said Jeremy Lehrman, executive director of the South Dakota Pork Producers Council.
  • Earlier this month, the U.S. Department of Agriculture estimated demand for corn in the coming year at 12.5 billion bushels. About 5 billion would be used for feed, 4 billion consumed by ethanol production, 2 billion sold overseas and the rest put to other food, seed and industrial uses. The nation was on schedule to produce just 11.7 billion. The shortfall would be made up by corn grown in previous years and stored. (uhh, that's a problem - we don't exactly have booming stockpiles)
  • But because of the soggy plants near Boland's farm and across the Midwest, analysts now think corn production could fall to about 11 billion bushels, draining supplies to precariously low levels.
  • "Our ethanol policy requires perfect weather, and not surprisingly, we aren't getting it," said Michelle Perez, senior agriculture analyst with the Environmental Working Group in Washington. (boondoggle)
  • "We have farmers that have had to plant the same fields two, three, four times," White said. "Even before all this flooding, we can't get the crops in. The land's just too wet."
  • The floods also have disrupted the movement of goods across the heartland as roads and rail lines have been submerged. Union Pacific Corp. has closed off parts of the east-west main line across Iowa. Cresting floodwaters in nearby states have limited the railway's ability to reroute cargo. Union Pacific won't see the full extent of the damage to its tracks until the water recedes.
Long Powershares DB Agriculture Double Long ETN in fund and personal account; long iPath Livestock ETN in fund

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