if one thought that grains, esp wheat and corn, were going to launch next year,, particularly in the second half, how could one trade other than buying ADM, BG, POT, MON, AGU, CF etc... any direct plays?
Why would increased grain prices help ADM?
Aren't they a big buyer of grain who then processes it into other products which may or may not increase in price?
I would think ADM would be an arbitrage for higher grain prices.
for one their inventories will increase in value, also they have set purchase contracts and can profit on the spread on the spot mkt, three when investors go rushing into the gain trade, there arent a lot of choices... i believe even the fertilizer plays will do well even though they will be even further removed from the action...
I am no expert but pretty sure i cannot predict short term commodity prices. long term agricultural commosities are going higher. imo even the most expert commodity experts can make a wrong call, but i dont think adm gets it wrong very often.
What i like about adm is that it is like a utility to a great extent. Regardless of commodity prices adm generates earnings processing and delievering the products. To some extenet adm must have to hedge or make opportune purchases of commosities. I am thinking adm has about the best market intelligence on where commodity prices are going, since its able to gather the most current conditions from field to silo and country to country. This is why i am content to let any commodity trading be up to them.
Thinking all the ag sector is strong long term. Maybe a couple of stocks and the ag etf are the smart way to play it. Given world population growth and the imporving economy in China, India and hopefully other places the demand is going much higher. So while organic growth is happening adm is also making acquisitions. Thinking 2010 and beyond is going to be much stronger years for adm. My favorite long term pick. jmho.
Trading commodities is a risky business imo. This is why i like adm its got many diverse revenue streams and proabably the best market intelligence on commodity prices. I would not call adm a commodity trader in the stock market sense but by nature of its busines has to be on top of such things. imo adm is more like a utility and the products transport and sell at some baseline level regardless of price. seasons greetings.
Look at the supply chain and use of grains, and then at the margins each step of the process makes.
Farmers make squat, and their margins are pretty steady. I am laughing to myself at news of the Optima hedge fund "investing" in farmland and touting 15% returns to potential investors. Maybe they are buying "farmland" in Arizona that they can flip in a few years for real estate development, and have an exit from the "farmland" business after there is no more irrigation water available for their former cotton fields.
Iowa farmland is some of the most fertile in the world, and yes, it has steadily risen over the past few years. BUT, if history keeps repeating itself, Iowa land that is now averaging $4500 to $5500 an acre will soon return to $3000 to $3500 levels within a few years.
Meanwhile, land now valued at $5000 an acre is receiving annual rents of $225 to $275 an acre for the 2010 year. Subtract $20 a year in taxes, and then income taxes, and that is your net for your investment as a landlord. If you use a farm management company, rents may be slightly higher, but you will pay them 10% for their work in managing your "investment".
I prefer to invest in companies that take the commodity and turn them into finished goods. The processors and retailers make the best margins. They also actively hedge their inputs to protect their margins and their business. They have research departments, and people who do nothing but hedge their costs to insure their profits. If input commodities go up, they still make their profits. Let them do the hedging for you, and make the profits you seek. If grains go up, they will make more money too. (3 to 10% of $1000 of inputs is a higher net than the same % of $600 of inputs)
Some of my favorites: General Mills (GIS) - breakfast cereals, etc which are staples in the American diet. Kellogg's (K) - also cereals. ConAgra (CAG). Sara Lee (SLE). All are large companies, and all use large quantities of raw commodities - grains, meat, etc as inputs. Demand is slow growth, with a good or a bad economy. People must eat.
Other companies act as middlemen, and lots are privately held (such as Cargill). ADM is a processor. They buy commodities, and then turn them into things like cooking oils, animal feeds, food ingredients, alcohol, etc. They make a cut for their work, which is fairly consistent. Bunge (BG) buys and sells grains and transports them to markets. They also do some ingredient production.
These companies handle billions of bushels a year, and make a small, but consistent margin. And it is hedged the minute it hits their scales for the purchase, until it is converted into a finished product that is being sold.
Want a good read this winter for those times you are not trading or doing research, and want to learn a bit about the grain business? Then read "Cargill : Trading the world's grain" by Wayne Broehl. Copyright date is 1992, but the grain business hasn't changed since.
thx for the info! really would like to get positioned for this expected move, thinking long term in the $$ calls on BG one of best plays, looking at trading futures but not expecting ramp till second 1/2 so best leveraged bet would be to buy them in May or so and calls on ag plays around that time...
if ur objective is a long-term risk position of long wheat & corn,
(1) long agribiz stocks is a pretty indirect way of getting there. there is some correlation, but it isn't that tite.
(2) u mite find an etf or 2 that would accomplish your objection.
(3) futures options are a possibility. but the time decay in a simply long calls position can eat you alive & the more complex positions sometimes sold by retail brokers often aren't competently analyzed as to risk/reward.
(4) consider a very conservatively leveraged long futures position. in other words, hold a lot of trading capital in reserve against possible margin calls.
(5) another possibility is investing in farmland, perhaps thru an llp. however, it's difficult 2 get much wheat exposure this way.