The Low Risk And High Risk Reward Agriculture Trade to Make Right Now
Tue, Jul 17, 2012
Agriculture Investment Opportunities
It happens every few years.
Each time it creates a Low Risk And High Risk Reward Investment opportunity perfect for contrarian investors.
Now it’s happening all over again.
Here’s the set up.
The neo-Malthusian crowd has latched on to the “next disaster” facing the world.
Once again, it’s in the agriculture sector. After all, a food shortage is easily understandable and highly relatable by the average consumer (and, more importantly, the average investor).
But the doomsayers are likely to be proven wrong once again and you can get positioned now to profit from it.
Yes, we know the United States has been hit by a significant drought recently. Yes, it is the worst in decades. And yes, it’s going to be a tough year for crop production.
But will it really be the cause of the next Great Famine?
Odds say resoundingly it’s not going to be as bad as predicted. And there’s a big trading opportunity likely being created by the overreaction.
You see, it’s always something in agriculture which can send the markets into a buying panic.
Just a couple of years ago it was flooding in the Corn Belt. There was actually too much water. Planting was delayed. Fears grew over corn supply declines. And corn prices rose significantly.
When harvest came around, however, the crop turned out to be another all-time record.
This summer it’s the exact opposite situation creating the same opportunity. There’s too little water now. There’s a huge drought. Fears of corn shortages are rising. And corn prices are going soaring right along with the mass hysteria.
But we’re not buying it (and actually recommending “shorting” it) because we’ve seen this story play out many times before. It always ends the same.
It starts out simply and innocently enough.
An unexpected event like weather or natural disaster destroys a crop.
Supplies drop, prices rise.
It’s the market at work. And they’re working overtime now.
The current drought hitting the U.S. breadbasket has sent corn prices soaring back to their recent highs and beyond:
Now that corn prices have risen significantly and “priced in” much of the supply declines, the mainstream media starts pushing the story in front of investors.
CNBC advises “hot money” investors as to Why You Should Watch Corn Prices for Next Two Weeks.
BusinessWeek reports Corn, Soy, Wheat Seen Higher as Hot Weather Cuts Crop Conditions
Washington Post proclaims Drought in U.S. reaching levels not seen in 50 years, pushing up crop prices
They’re all late. And they’ll likely be all wrong as we move closer to harvest season.
You see, despite the hyperbolic disaster-warning headlines, there is much more to the story that is getting any above-the-fold press.
Just turn back to back pages for the full story. There you’ll see a much different picture coming together.
For example, Reuters refutes much of the hysteria in Larger U.S. Corn, Soy Area May Not Ease Drought Worry when it said, “American farmers likely sowed far more soybean seeds than they had originally intended this year and planted the most corn acreage in 75 years.”
Production per acre down may be down, but the acreage planted is up, way up.
So we have a simple and potentially lucrative situation.
Investors and traders have bidding up agriculture prices in anticipation of a catastrophic year for production. The herd has piled in.
There is a drought. It’s bad. But farmers aren’t just giving up. They are reacting the way they should. They’re irrigating more and taking other steps necessary to make sure their crop is as big as possible.
Scientists at Monsanto (NYSE:MON), Syngenta (NYSE:SYT), and Cargill are finding and implementing solutions too. They have developed corn breeds resistant to all kinds of potential problems including insects, disease, too much water, and too little water.
As they say, the solution to high prices will be, once again, high prices.
As a result, this time around is most likely no different than the last dozen times this has happened.
Agriculture prices will fall. This is not the Greater Famine of the 21st century. And the profits will be in the hands of Contrarian Investors.
Right now expectations have reached an extreme high. The financial community is planning for the worst in the agriculture sector and the best financial results from it all. That means it’s time to bet against the heard because the potential rewards far outweigh the risks at this point.
Look for 50% or more in our preferred contrarian investment vehicle for this trade – the PowerShares DB Agriculture Double Short ETN (NYSE:AGA). This agriculture exchange traded fund (ETF) goes up when agriculture commodity prices go down.
Now, please understand we’re still long-term bullish on agriculture.
The fundamentals of agriculture investments (especially farmland investments) will remain sound for many boom years ahead.
Slow growth of more fertile farmland
Inventories of corn, soy bean, and wheat continue to hover at record lows
Subsidies to not grow food are not going away
World is getting richer…and hungrier
Farmland is still in relatively short supply, although that’s changing over the long run
The long term is bright for Agriculture Investments. But the short-term is not looking like a safe or highly profitable bet.
Executive Editor, Contrarian Insights
The Group of Big Investors in United States.
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