How to Profit from Irrational Exuberance in Agriculture

Grain markets are on fire as traders worry that an unusually hot and dry summer will harm the crop. Wheat and soybean prices have posted large gains as the weather baked farmland across the Midwest, but corn was the biggest winner with a 32% gain in June. Now, traders are looking at those moves and plotting their strategies.

History shows there is a way to profit from moves like this in grains, but it’s probably not what you think...

Grain prices are driven by weather and a number of other factors. Analyzing these markets requires a great deal of specialized knowledge. Experts estimate the number of acres planted, the expected yield per acre, the chances that weather will damage part of the crop and the demand in each grain market among other things. Grains may be one of the most complex markets for analysts to understand.

Farmers are also very tuned into markets, and they decide what to plant in part based on their own market forecasts. They are also limited by the needs of their soil with crop rotation requirements playing a role in the decision. Users of grains then add to the market uncertainty. As prices change, demand varies. As one example, the jump in corn prices has led some ethanol distillers to scale back their production. Ethanol, a common gasoline additive, is made from corn and with prices up some refiners decided to idle their plants and wait for the market to adjust. They can quickly bring the plants back online if the price of ethanol rises or if corn prices drop. History shows that the latter is the more likely outcome.

News reports are comparing the current corn market to the one seen in 1988. That June, corn gained more than 16% but lost half of that gain in the next month. A year later, the entire rally had been wiped out.



This is a typical pattern for corn prices. July has been a down month 61% of the time over the last 44 years. The average decline in the month has been more than 20%.

After the recent run-up, corn is now extremely overbought. The short-term RSI, for example, has been above 90 more than five days in a row. Corn has fallen in the week after this type of extreme action more than 60% of the time. Prices have fallen after a one-month, 30% gain 100% of the time.

Traders could take advantage of these patterns by shorting corn. This can be done directly in a futures account. There is also an ETN that tracks corn, the Teucrium Corn Fund (CORN), and it is possible to short that ETN. An ETN is an exchange traded note. It is similar to an ETF except that is backed by derivatives instead of owning the underlying stocks as an ETF like SPY does. ETNs can provide access to markets that are more difficult for individual investors to trade... there are unique risks, however.

One risk is that there are times when large tracking errors develop in commodity ETNs, and directly shorting these funds carries a great deal of risk if that tracking error works against the investor. Tracking error is present in all index funds. It is a measurement of how the return of the fund differs from the underlying index. While corn futures gained more than 30% last month, the CORN ETN gained only 16%, about half as much. There are other risks with shorting, and they outweigh the potential gains in this trade. A better way to profit from an expected drop in corn is with an inverse ETN.

PowerShares DB Agriculture Double Short ETN (AGA) is a long position in a commodity index that delivers gains when grain prices fall. AGA is oversold on a short-term basis and 75% of the time a rebound has followed after becoming this oversold.



Traders get carried away in all markets and it looks like corn is a classic example of irrational exuberance. Buying AGA will allow traders to profit from this situation.

Jim Rogers: Much Bigger Problems Than Drought Threaten Grains

The price of grains and other agriculture products are soaring amid a crippling drought in the United States, but there are bigger supply threats to the sector than weather patterns, international investor Jim Rogers said.

Rising demand for food worldwide coupled with dwindling supplies, fewer farmers and not enough future farmers in the pipeline pose much bigger threats than a temporary U.S. drought.

"The world faces serious problems in agriculture," Rogers told Business Insider. "We are facing shortages of everything. The inventories are near historic lows so any problem will have an immediate, profound effect. We are facing a shortage of farmers so any problems will turn into even bigger," he said.

"The drought is a big deal if it's not raining on your farm. But it is good for farmers in other parts of the world. You can't have perfect weather conditions everywhere, every year. And with all the other problems, we're hitting trigger points," Rogers added.

"Such problems point to higher agricultural prices, and investors should buy now. Any weather problems will have big effects because of the dire situation in farming. Agriculture will be one of the best sectors of the world economy for years as I have told you often," he said.

The drought has gripped much of the nation, and not since 1956 has so much of the United States been stricken with drought conditions, the Washington Post reported, citing National Climatic Data Center data.

About one-third of the nation's corn crop has suffered from the drought, while wheat and soybean prices have risen as well.

"We're moving from a crisis to a horror story," Purdue University agronomist Tony Vyn told Reuters. "I see an increasing number of fields that will produce zero grain."

Stock Market Cycles Are Topping This Week

I have put together a very detailed video this morning coving bother some long term, short term and market cycles. The video is a little longer than normal but I want you to understand fully where the market is trading and what to look for in the coming days.

Pre-Market Analysis Points:

- Dollar is trading higher this morning which is putting pressure on stocks & commodities.

- Fed Chairman Bernanke Testifies at 10am ET which will cause all investments to move wild.

- Oil is trading slightly lower and oil inventory numbers come out at 10:30am ET.

- Natural gas is flat and continues to build a base at resistance for a possible future breakout.

- Gold, Sold Miners and Silver continue to consolidate within a multi month pattern. A major move is brewing but has not been triggered as of yet.

- Bonds are trading up from yesterday’s close after pulling back from reaching our double top price target on Monday.

- SP500 is nearing a couple resistance levels (previous pivot high, down trend line) Momentum, short term and intermediate cycles are starting to top and that means we should be prepared for a pullback/down trend which could last 4-6 weeks.

McAlvany Weekly Commentary

Alan Newman on Precious Metals

Posted on 18 July 2012.

A Look At This Week’s Show:
-The Gold Bull could last another 7-10 yrs
-Buy Gold stocks for dividends and coins for safety
-Long consolidations lead to higher up moves

About the Guest: Alan M. Newman, the Editor of Crosscurrents, was born on June 24, 1940 in Brooklyn, New York. He has been married for 38 years and has two boys, 29 and 23, both Eagle Scouts. Mr. Newman has formerly enjoyed careers in acting, computer programming, game design and real estate and currently resides in Nassau County, NY, where his recently retired wife Ali received a Doctoral degree in Literacy Studies. Dr. Newman still teaches two classes as an adjunct Professor at Hofstra University.

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Werner Enterprises Inc. (NasdaqGS: WERN)

Werner Enterprises, Inc., a transportation and logistics company, engages primarily in hauling truckload shipments of general commodities in both interstate and intrastate commerce in the United States and internationally. The company operates in two segments, Truckload Transportation Services and Value Added Services. The Truckload Transportation Services segment operates regional short-haul fleet, which transports various consumer nondurable products and other commodities in truckload quantities; medium-to-long-haul van fleet that provides comparable truckload van service over irregular routes; and the expedited fleet, which offers time-sensitive truckload services. It also provides truckload services dedicated to a specific customer, including services for products requiring specialized trailers, such as flatbed or temperature-controlled trailers. This segment principally transports retail store merchandise, consumer products, grocery products, and manufactured products. The Value Added Services segment provides non-asset-based transportation and logistics services, including truck brokerage, freight management, rail transportation, and shipments management services. Werner Enterprises, Inc. was founded in 1956 and is headquartered in Omaha, Nebraska.

To review Werner's stock, please take a look at the 1-year chart of WERN (Werner Enterprises, Inc.) below with my added notations:

Over the last (7) months, WERN has been consolidating within a couple of long-term price levels. First, WERN has formed a clear support level at $23 (navy). In addition, the stock has also been forming a down trending resistance level (blue), which has now been tested (4) different times. These two levels combined have WERN stuck within a common chart pattern known as a Descending Triangle that will eventually have to break one way or another.

The Tale of the Tape: WERN is currently trading within a very large Descending Triangle. A long trade could be made on a break above the down trending resistance or a pullback to $23 support. Or, you could enter a short trade on WERN if the stock breaks below the $23 support level.

Why I'm buying one of America's most hated sectors

Investors could make big returns over the next few months buying steel stocks at current levels

Steel companies are down 20%-plus over the past six months...

That shouldn't surprise most investors. As regular readers know, companies that produce steel used for building skyscrapers, cars, bridges, and power lines are among the greatest "boom and bust" assets in the world. They soar and crash as the global economy fluctuates. The price rises when investors expect growth. It falls when things slow down. And with most global economies slowing down lately, steel stocks have been falling...

But things are about to change... In fact, investors could make big returns over the next few months buying steel stocks at current levels. Let me explain...

As you can in the chart below, steel stocks – as measured by the Market Vectors Steel Fund (NYSE: SLX) – have trailed the S&P 500 by 23 percentage points over the past six months.

Steel stocks are suffering from fears of a global economic slowdown. Most of Europe is in a recession. China's economy has slowed from 12% GDP to less than 8%. And the U.S. economy is barely growing at all... Unemployment is still high and manufacturing has tailed off significantly in the past few months.

Sure, it looks dire out there – especially if you believe the negative headlines you read every day. But the last time we saw a global slowdown like this, it turned out to be the buying opportunity of a generation.

During the 2009 stock market crash, SLX fell below $25. Back then, most steel stocks traded below seven times earnings. One year later, the index jumped 140% to $65.

I don't expect the triple-digit gains we saw when steel stocks rallied from their super-depressed lows three years ago. But with most governments ready to do whatever it takes to "goose" the economy, steel stocks look oversold here.

I expect most steel companies to outperform the markets over the next 12 months. But my favorite way to play this sector is through shares of Steel Dynamics (NASDAQ: STLD), one of the largest steel companies in North America. With a market cap of $2.6 billion, it pays a much higher dividend and has stronger operating margins than competitor U.S. Steel (NYSE: X, Stock Forum). It's also much cheaper and expected to grow earnings faster than steel giant Nucor (NYSE: NUE).

Steel Dynamics trades at just eight times forward earnings. That's a 30% discount to the S&P 500. Excluding 2009, the company is trading at its lowest price-to-book and price-to-earnings valuation in more than seven years.

Over the next two years, Steel Dynamics is expected to grow earnings by more than 50% annually. This is the average estimate provided by 21 research firms covering the stock. Even if their estimates are off by half, the stock is still incredibly cheap based on price-to-earnings growth.

Steel Dynamics pays a 3.3% dividend. The payment is easily covered by earnings and cash flow. That's 40% higher than the average S&P 500 company. With most high-yielding sectors like utilities and consumer staples trading near 52-week highs, income investors may turn their attention to this undervalued stock.

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