Agricultural Commodities on Sale

The day before I wrote “Spend your Gold on Wheat and Oil,” gold futures closed at $837.40 / troy oz, oil at $39.31 / barrel and wheat at $211.69 per metric ton. That was December 19th, 2008. In the short time that has passed since then, both oil and agricultural commodities experienced a significant rally (and an almost corresponding correction) while gold mostly trended down.

Today, wheat and oil futures are again gaining some ground, unable to break below their short term support levels. At my last check gold futures were changing hands at $826.40, oil at $40.23 and wheat at $218.40. This looks like an inflection point on the graphs for wheat and oil and agricultural commodities and oil should resume their longer term trend up vs. gold from here.

I see this as a great opportunity to get into agriculture and the most convenient way I found to do so is via PowerShares DB Agriculture Fund (DBA) - an ETF with approximately equal weightings (exact daily weightings are available here) in four agricultural commodities – wheat, sugar, soybeans and corn (maize).

As I reported in “Spend your Gold on Wheat and Oil,” gold was 52% more expensive vs. wheat, than the monthly average over the previous 25 years. Based on the past 25 years of monthly data, it was also trading at a 52% premium vs. soybeans, 56% premium vs. corn and a whopping 65% premium vs. sugar. Turned out that on historical basis, the weighted average of DBA assets was at this point 56% undervalued vs. something made of gold, such as SDPR Gold Trust ETF (GLD).

Tuesday, after an ag commodity mini rally and a correction, DBA assets are 47% undervalued vs. gold, if you use the 25 year monthly average as the gauge. Wheat, sugar and especially soybeans have made great strides towards parity, but the DBA weighted average of commodities has only appreciated by 6% vs. gold so far. In the meantime DBA itself moved up 4% from the December 19th closing price of $23.72 / share up above $27 / share a week ago, only to retreat back down to $24.66 / share, where I picked it up yesterday.

If, by some miracle, DBA should revisit the early December lows, while gold stays within its current trading range, I will be looking to add to this position.

Disclosure: Long DBA, GLD, OIL

Comments

[John Lounsbury:]

Jake - - -

I have been thinking and doing exactly the same thing for DBA. If we have another bout of disillusionment for stocks DBA may get knocked back to the December levels and I agree that would be a great opportunity.

Jan 14 10:47 AM

[GMiki1:]

I agree that AG is a great sector, but please don't judge gold right here while the indexes are readjusting. This is a weird week for the precious metals. Of course if you see Ted Butler's essay this week, you'll note that even he can't say where gold is going in the immediate future. At any rate, AG is an excellent place to be.

Jan 14 11:13 AM

[Rob Viglione:]

An interesting analysis would be to see how AG performed during the 30's and 40's. The world's response to this financial downturn is entirely different than then, so we can expect the outcome to vary as well. However, as a minimum I think we can use historical statistics to establish a high confidence lower bound to expectations.

Jan 14 11:27 AM

[AndrewBaker:]

Right now it's tough to call gold and softs, whilst oil may be closer to a trend change than it has been since it peaked last summer at $147. Dollar strength is affecting things in an unusual way. If the dollar falls (against the Swiss franc particularly), expect gold to rise. Dollar strength in the past few days, when I would not expect it, has meant that gold has fallen. Surely the dollar must weaken soon, especially with "quantititive easing" being undertaken? Then I'll go long gold again, having just switched from my long position taken out in December. Softs looked like they were turning and again I went long in December. I changed tack to short yesterday, but anticipating that could change again very quickly. I've carried a short oil position for a few months now (and missed the short long opportunity over Christmas, drat!), and am still in it: but later this year, I may change direction. Or, if the price drifts, may come out and just wait. Good luck to all in all of your positions (as long as they are similar to mine!)

Jan 14 12:02 PM

[Market Folly:]

legendary investors and founders of the great quantum hedge fund (now defunct) george soros and jim rogers share your thoughts re: agriculture. Soros' hedge fund owns a ton of $POT and rogers has said numerous times that he is buying agriculture and is bullish on it, citing the current situation as just a catalyst for a big squeeze going forward. here's soros and rogers thoughts: www.marketfolly.com/20...

and then soros' hedge fund latest holdings (including his big $POT holdings): www.marketfolly.com/20...

Jan 14 12:53 PM

[Conan the B...:]

Inflection Point? I gather that means "don't wait, buy now".

I do not know whether it is or isn't. Let it move Down for a few more days to see if there is any support.

I like DBA but would like it at $23 better.

Why commodity index realignment would affect gold at all, given all of the demand for it, also escapes me.

The future for AG is bright but the future for individual AG prices is not. Many are weather dependent, some are economically dependent.

Personally, I now use the Charts provided by IBD to try to gauge commodity directions. Is DBA overbought currently? IMO, I think so.

In a Bull market, I would consider it to be undervalued. In a Bear market? It has gone up too far too fast.

Besides, I have a favorite pick and the CEO of that company was interviewed last year. He felt that the demand for his product would not pick up until this spring.

Company is Intrepid Potash, IPI. A public pure play in potash is hard to find. Potash mines take 3-5 years to develop. Buy it now, no.

There is time. Why tie up money unnecessarily.

Jan 14 02:39 PM

[Larry House:]

I am not going to sell my gold just yet, but I have taken a position in GCC, a basket of 17 commodities, which includes ag products as well as oil, natural gas, heating oil, gold, etc. It may be a bit more of a shotgun-approach to commodities than is DBA, but I think it is a worthy holding for the next year or so. I also agree with your view on oil. Commodities appear to have as good a chance as anything over the coming months. Life goes on, and they are about as basic as it gets.

Jan 14 03:43 PM

[Conan the B...:]

Larry: Selling physical gold or silver is not an option I would advise.

But for trading purposes, say 3 months, I like DZZ.

I am not a Gold Bear, I believe in accumulating physical gold for the long haul. But I am an investor first and foremost.

The USD is strong and looks to get stronger, rationally I can not make an argument that Gold will rise in Dollar terms at the same time.

Everyone quotes Jimmy Rodgers', but they only highlight the Quotes they like. Mr. Rodgers has indicated that gold can easily go down by 50-60%, it did so in the 70s.

Silver can go down to $6 where he will be buying hand over fist. He is bullish but admits there is no free lunch and that corrections will happen.

Rodgers is very bullish on China but he freely admits that if China does not solve its clean water problems. The whole Chinese development will come to a screeching halt. Cities will remain vacant.

Back when the Chinese stock market was at 3,000 on its way to 6,000, he came out with the statement that he was no longer buying Chinese because valuations were too high. A couple of years later, he remains a staunch bull.

There is an old adage: In times of war, gold is the only currency which will get you across the border.

Jan 15 12:59 AM

[donzelion:]

Concur with PaulTaut - The future for AG is bright but the future for individual AG prices is not. That strikes me as the best argument for DBA v. individual commodities futures.

But the tax treatment of commodities investments is undesirable for me. I'll stick with the underlying companies (MOO and comparable) unless I'm trading with someone else's money.

Jan 17 02:02 AM

[SoYouThinkY...:]

I added up to date charts and data for commodity ETFs and ETNs to my website. GLD (Gold), LD (Lead), NIB (Cocoa) and BAL (Cotton) all look strong.

Take a look at soyouthinkyoucaninvest.../

I also compiled a complete list of all the commodity ETF and ETNs available to US investors as well as detailed data on each and saved them in a convenient google spreadsheet that everyone can view and download.

Take a look at soyouthinkyoucaninvest...

Jan 18 08:22 PM