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. (OTC:KCLOF).