Lackluster Grains Ready to Rally

The rise in commodity prices in recent months has been a boon for investors. That is unless the resource of choice is grains. But that all could change shortly, says Robert Winslow, Wellington West analyst. And if grain prices start to rise, so too will farm stocks.

"If grains break-out, we could realize material outperformance in [agriculture] equities," said the analyst in a note to clients.

From recent troughs, copper is up 120%, oil is up 96%, gold is up 42% and natural gas is up 34%. Grain prices, meanwhile, are only up 5%, Mr. Winslow said.

On Tuesday, wheat for December delivery fell as much as 0.9% to US$4.50 a bushel, its lowest since April 2007 as favorable weather in parts of the U.S., China and Australia boosts production potential amid rising stockpiles.

Mr. Winslow said grain stock-to-use is stabilizing however, and while global supplies are up from ‘08 lows they remain 14% below the 10-yr average. The latest USDA data also indicates deceleration of rising supplies.

The fact that grains are now near production costs also suggests limited price downside, he wrote.

"In Dec ’08, grains rallied off prices similar to those seen today, which incidentally correspond closely to estimated US farm production costs," he said.

Mr. Winslow's strong buys include Alliance Grain Traders Income Fund, Cervus LP, Hemisphere GPS Inc. and Potash One Inc. (KCLOF.PK).

Comments

[Mad Hedge F...:]

wwn The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff’s strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a “V” shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he’d much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we’ll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small “W”’s, or what I refer to the as the “square root” shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.

Sep 15 02:11 PM