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Thread: picking a winner : the next commodities to cash in with ...

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    Default picking a winner : the next commodities to cash in with ...

    ... probably aren't going to be precious metals or industrial metals, but FOOD ...



    (snip)"This year cars, not people, will claim most of the increase in world grain consumption. The problem is simple: It takes a whole lot of agricultural produce to create a modest amount of automotive fuel.

    The grain required to fill a 25-gallon SUV gas tank with ethanol, for instance, could feed one person for a year. If today's entire U.S. grain harvest were converted into fuel for cars, it would still satisfy less than one-sixth of U.S. demand.

    Worldwide increase in grain consumption

    The U.S. Department of Agriculture reports that world grain consumption will increase by 20 million tons this year, roughly 1%. Of that, 14 million tons will be used to fuel cars in the U.S., leaving only six million tons to cover the world's growing food needs.

    Already commodity prices are rising. Sugar prices have doubled over the past 18 months (driven in part by Brazil's use of sugar cane for fuel), and world corn and wheat prices are up one-fourth so far this year.

    For the world's poorest people, many of whom spend half or more of their income on food, rising grain prices can quickly become life threatening.

    Once stimulated solely by government subsidies, biofuel production is now being driven largely by the runaway price of oil. Many food commodities, including corn, wheat, rice, soybeans, and sugar cane, can be converted into fuel; thus the food and energy economies are beginning to merge.

    The market is setting the price for farm commodities at their oil-equivalent value. As the price of oil climbs, so will the price of food.

    In some U.S. Cornbelt states, ethanol distilleries are taking over the corn supply. In Iowa, 25 ethanol plants are operating, four are under construction, and another 26 are planned.

    Iowa State University economist Bob Wisner observes that if all those plants are built, distilleries would use the entire Iowa corn harvest. In South Dakota, ethanol distilleries are already claiming over half that state's crop."(snip)


    The financial 'talking heads' are of the opinion that this will translate into an increasing demand for corn in the short term to supply all of the ethanol refineries now being built. This in turn will cause a continuing increase in the market price of corn ... at least until the use of different agricultural products like switch grass is developed to feed these new refineries instead (which the 'talking heads' claim to be 5 years down the road). But how can a small time investor cash in on corn ?

    At the moment, the only 'pure plays' on corn are via the COMEX ... but to trade corn futures contracts requires opening a commodities brokerage account and the trading of corn futures contracts involves high dollar amounts and potentially high risks (unless you're prepared to take delivery and store a truckload of corn when the contract expires !).

    Stocks are available for companies that deal in corn, like ADM. But these are far from being 'pure plays' since these companies are involved in lots of different aspects of the agro-business. The 'talking heads' are of the opinion that since ADM and other companies like it are involved in both the corn growing and ethanol production ends of the same business, that their gains from rising corn prices will be cancelled out by profit margin squeezes in ethanol refining (where the price of their 'raw material' rises faster than the sale price of their 'product').

    Probably the very best investing opportunity in corn from the supply end would have been Pioneer Hybrids, who produce hybrid/engineered seed corn and compatible fertilizers and insecticides. Unfortunately from an investor's standpoint Pioneer is a division of DuPont, which means that in order to invest in Pioneer you're also forced to invest in everything else DuPont is involved in from US auto paints to explosives. Apparently all of the hybrid/engineered seed corn companies are all now divisions of highly diversified conglomerates like BASF, Monsanto, Bayer (yes the aspirin maker).

    One fact which seems to emerge from all this is that, in the short term at least, American corn farmers need to grow as much corn per acre of farmland as they possibly can in order to supply both the food products market and the ethanol refiners. To do this they need ... FERTILIZER ! Logic would dictate that after US corn farmers see the high price of corn and dwindling supplies of already harvested corn in storage, that they're going to buy tons of fertilizer over the coming winter in preparation for planting a huge corn crop next spring.

    Again, there aren't very many 'pure plays' to be had, but one company stock that seems to fit the bill is POT - Potash Corp. of Saskatchewan. Think that I should buy some POT shares on spec during the traditional september-october stock market pullback ? The Wall St. analysts aren't crazy about this stock ... but sometimes that means it's the perfect time to get in on the 'ground floor'.
    ~
    Last edited by Melonie; 08-26-2006 at 06:54 AM.

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