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Tony Daltorio, The Investment U Research Team
At times it is extremely easy to make money in the financial markets. All it takes is a bit of common sense and using your head – your “bean”.
For instance, there is a basic truism – people need to eat. Yet investors, including many on Wall Street, ignore that truism and go off in search of the next trendy hot technology stock or unproven miracle stock.
Perhaps they think people can exist simply on their Blackberry or iPhone and no longer to eat food.
I am here to tell you that people still do indeed eat food, lots of it, every day. After a year about worrying about their piggy bank, some alert investors are turning their attention again to the cupboard. And, oh my, the cupboard is nearly bare…
Here’s how to use your old “bean” to profit from this basic fact of life and the profitability of other beans.
The Grains Story
Almost unnoticed by Wall Street, agricultural commodities prices have returned to levels not seen since the start of the 2007 to 2008 food crisis. Prices for soybean, corn and wheat have moved to their highest level in over 8 months and are up more 50% from their December 2008 lows.
We’ve seen forecasts of lower supplies due to reduced planting and the impact of a drought in Latin America and Argentina. However the biggest price increase for grains comes on the back of very strong demand from China. The world most populated nation has been migrating its diet from vegetables to meat.
For example: In 1985 the average Chinese consumer ate 44 pounds of meat per year. Today, it has more than doubled to 110 pounds of meat per year. That may not seem to extreme. But when you consider that it takes 17 pounds of grain to generate one pound of beef you can start to see how it adds up quickly.
Unfortunately, we’re not seeing a comparable increase in supply from the 2009-10 season. In response to low prices last autumn many farmers cut their planted acreage. In addition, higher costs for inputs such as fertilizer and pesticides combined with difficulties in securing financing due to the financial crisis – particularly in countries such as Brazil and Ukraine – all impacted plantings as well.
The International Grain Council, an inter-governmental organization, forecasts that global grain supplies would fall in the 2009-10 season by 4.3%. At the same time, they are forecasting a rise in demand for grains by 0.8% Many agricultural experts would add that we are not well prepared from a supply and demand standpoint to absorb any weather-related surprises globally and that it is essential that the United States have a good growing season.
The Soybean Story
The area with strongest fundamentals by far is the entire soybean complex – soybeans, soymeal and soy oil. It’s a simple supply and demand story which has created extraordinary pressure on U.S. supplies of soybeans.
On the demand side, there has been voracious demand from China. China’s imports of soybeans rose in excess of 36% in the first four months of this year. Chinese demand has dominated the soybean market for a decade. In 2000, China was responsible for 35% of global trade in soybeans. By 2008, that figure had risen to 73%.
The root of the current supply problem lies in Argentina, the world’s third largest exporter. Argentina produces 21% of the global supply, Brazil produces 28% and the US produces 33%. Argentina’s soybean crop is expected to fall by nearly a third due to a devastating drought. Other areas in Latin America, such as Brazil, are also experiencing drought related problems and their crop production will also be lower by about 7%.
Some experts warn that the United States’ inventory of soybeans falling below the psychologically significant level of 100 million bushels appears increasingly likely.
The U.S. Department of Agriculture is more optimistic, saying that inventories would only drop to 130 million bushels – which is still just one week’s global supply and a 40-year low inventory level!
The USDA figures are probably too optimistic as U.S. export sales are already above the government’s forecast target of 1.24 billion bushels, with 14 weeks left to go in the current season. The hope is that the Chinese and others will delay their purchases until the new harvest is available in October and November.
The price of soymeal – critical for fattening livestock such as chickens and hogs – has moved above $405 a ton, a level only seen for a brief period in 1973 and during four weeks at the peak of last year’s crisis. The soymeal supply shortfall from Argentina is estimated at 2.2 million tons.
This shortfall cannot easily be made up from the U.S., which consumes most of its soymeal domestically.
One example of the effects of the rise in the price of soymeal is that the price of ready-to-cook chicken in the US has risen to the highest price in a decade at 87.11 cents per pound.
Playing a Surge in Soybeans
So how do you make money from the soybean story besides trading the futures?
There are two iPath ETNs which offer large exposure to the soybean complex – iPath Dow Jones-UBS Agriculture Subindex Total Return ETN (NYSE: JJA) and iPath Dow Jones-UBS Grains Subindex Total Return ETN (NYSE: JJG).
The Grains ETN (JJG) consists of only three grains – corn, wheat, and soybeans with soybeans making up approximately 45% of the index.
The Agriculture ETN (JJA) is broader based and includes corn, wheat, sugar, coffee, cotton, soybeans and soybean oil. Soybeans are roughly 27% of the index and soybean oil is a bit less than 10% of the index.
Investors need to keep in mind that ETNs or exchange-traded notes are senior, unsecured, unsubordinated debt instruments of the issuer. As such, they are subject to the risk that the issuer may run into financial difficulties.
If investors wish to avoid the ETN risk, they can turn to an ETF that actually owns the commodities futures. The best choice in the ETF arena is the InvescoPowerShares DB Agriculture Fund (NYSE: DBA). This ETF has 25% devoted to each of the following four commodities: sugar, wheat, corn and soybeans.
So next time you feel hungry, instead of reaching for a snack, reach out to purchase some agricultural commodities like soybeans.
Good investing,
Tony Daltorio
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One Response to “Use Your “Bean” to Profit”
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July 2nd, 2009 at 3:34 am
Really nice tips on Soybean Profiting. I like it.
Thanks a lot for nice share.
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