Exploiting Harvest Delays: A Healthy Portfolio Needs More Vegetables

Most commodity investors with whom I come into contact are trading energies and metals, but perhaps a healthy portfolio needs more vegetables. With the slowest harvest in over two decades, we believe more investors should be looking towards agriculture. Looking at the macro view, in our opinion, adds further bullishness, being soybeans and corn are a staple in one’s diet, and with more mouths to feed we should see demand grow exponentially in the coming years.

In the most recent USDA crop report, they expect the corn harvest to be 12.9 billion bushels, down 1% from the October forecast. They also decreased the yield by 1.3 bushels/acre, which we feel is generous and expect further reductions. While the corn crop is projected to be the second largest on record, up 7% from last year, the demand for corn and its byproducts may be growing at a faster pace.

As for soybeans, the yield was increased marginally to 43.3 bushels/acre with a crop size of 3.3 billion bushels. The usage of soybeans is projected to increase, so if the crop size or yields come into question we expect prices to respond by moving higher.

The problem has been excessive rain that has hindered farmers from getting into the fields to harvest their crops. In the month of October top growing regions around the country received at least twice the normal amount of rainfall. That in combination with unusually cool temperatures slowed crop development. Farmers have only managed to harvest about 40% of their corn crop compared with the 80% plus we have been averaging for the last 5 years. In soybeans, circumstances are not much better, being farmers have only harvested 80% and should be completely harvested at this point. Complicating things further, farmers will need to spend more money to dry their crops. If harvest delays continue for corn and soybeans, it is feasible that farmers that double-crop will be unable to plant wheat this fall.

Though we focus on corn and soybeans in this article, weather problems in Indonesia and the Philippines are wreaking havoc in the rice market. The Mississippi delta, which is a massive cotton growing area too, has encountered excess rainfall that is affecting the cotton market. In the same USDA report, cotton production was forecasted to reduce 3.8%, or 12.5 million bales.

The sad reality is that when Mother Nature misbehaves, money can be made and lost. Floods, droughts, hurricanes and other natural disasters disrupt the norm and create trading opportunities.

Buying corn in late October/early November and holding until mid-May is one of the best seasonal trades out there. This trade has worked 34 out of the last 40 years, for a success rate of 85%. This trade has had a 10-year win streak that began in 1998. Past performance is not indicative of future results. With more competition for corn inventories from animal feed, energy needs and foreign business, coupled with the growing cycle and harvest delays, we think being long corn makes sense. Corn prices have started to move higher with March 10’ corn advancing 25% off a 3 ½ year low made just over 2 months ago. We suggest gaining long exposure in March or May contracts via call options or long futures with option protection. We see the $3.75/3.80 level acting as support and expect prices to trade near $4.80 in Q1 next year.

The United States is the leading producer of soybeans, though a larger than anticipated crop from China or Brazil will have an impact as both countries are becoming increasingly bigger players. Unlike corn, soybeans cannot be stored for an extended period, which makes prices at times more volatile. For the last month soybeans have traded sideways in about a 60 cent trading range. As long as prices stay above $9.50 on the March contract we like being long. We are not currently exposed to soybeans with clients but will be looking for long opportunities on a setback. We suggest buying $1 call spreads or to trade long futures with options protection. Trading soybeans is a bit more expensive than corn and also expect more volatility, so perhaps trade a lighter position size. With an increase in harvest delays, a reduction in crop size, and as long as South America and or China do not have an immense crop, we would expect soybeans to find their way back to $11 early next year.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Comments

[eggfaced:]

Agriculture and farming is one area where the fundamentals are constantly improving as new loans for farming are very hard to get as a result of the credit crunch. As the U.S. standard of living continues to plummet, a greater and greater percentage of the household budget will be for food. Demand for the basic food staples as you point out will only increase as the undeveloped world develops at America's expense. Food prices are set by a global market and we are no longer competing within the U.S. for food but with 2 billion Asians that are very hungry.

Nov 13 01:40 PM

[dividend_gr...:]

Most of our grains are shipped by railroad.

Nov 13 03:00 PM

[User 458412:]

any suggestions for an etf in these two sectors?

Nov 13 03:06 PM

[eggfaced:]

DBA which is the Powershares Agriculture ETF. Heavily weighted in corn, soybeans, sugar and wheat among others. There are also numerous ETNs (if you trust them) that track individual commodities.

Nov 13 03:11 PM

[irasil:]

So what is the best vehicle to trade or buy these type of crops - dba or rjn?

Nov 13 05:15 PM

[AnonAnon:]

Even stocks like John Deer, fertilizers etc do extremely well when commodity prices go through the roof.


On Nov 13 05:15 PM irasil wrote:

> So what is the best vehicle to trade or buy these type of crops -
> dba or rjn?

Nov 14 11:31 AM

[UK farmer:]

40 years ago, in every £ spent on food, the farmer received half- today the farmer receives 10%; food sourced by multinational companies allows food to be purchased on one continent, and sold at a profit on another with no regard to domestic agriculture.
As a capital intensive industry, the flight of capital from farms to further up the food chain has to slow- or the poor will not be getting enough food from the existing farms, as it will be priced above their means, because the costs of growing are increasingly burdensome and not being made.
Corn, soya, rice wheat may well go up in price but there is a dramatic social cost to be paid, sometime.
Peak oil, peak gold are of little consequence when compared with peak soil, peak food.

Nov 14 11:48 AM

[secmaven:]

Brazil has nearly unlimited rain forest land that can and is being converted to double crop soybeans. There will be no money made in this crop.

Nov 14 12:33 PM

[MexCom:]

You got to be a fruit to invest in your "vegetable" plays.
Harvest delay worry is a thing of the past. Modern farm machinery allows for the harvest of high moisture crops and most farms have access to grain dryers. This increases their costs of harvest but in the end - the crop is brought in and with less harvest loss than ever before.

USDA's recent crop report only clipped a bushel of the otherwise record high yield for corn to be one of the biggest crops ever. Low demand for ethanol will crimp the demand through next year. Their projections rely on historic norms and trends but may not adequately account for improved harvest methods and lower harvest loss. By the time the final Acreage and production figures are released - I'd look for an increase in yield.

Buying high and selling low is not the way to go.

A better play is to bet on the corn processors. My bet is on GMK. A large crop will give the millers and ag commodity marketers lots of business.

Nov 15 07:38 AM

[Plan B Econ...:]

The economics of food definitely has to change with higher oil prices. Farmers have been squeezed by seed and fertilizer providers on one end and by supermarkets on the other side.

On top of all that, local farmers have been replaced by huge farms with cheap labor located in China or other developing nations. Cheap oil has made it possible to transport food half way across the world. But higher oil prices will change the economics of the business, giving local growers more pricing power once again.

www.planbeconomics.com.../


On Nov 14 11:48 AM UK farmer wrote:

> 40 years ago, in every £ spent on food, the farmer received half-
> today the farmer receives 10%; food sourced by multinational companies
> allows food to be purchased on one continent, and sold at a profit
> on another with no regard to domestic agriculture.
> As a capital intensive industry, the flight of capital from farms
> to further up the food chain has to slow- or the poor will not be
> getting enough food from the existing farms, as it will be priced
> above their means, because the costs of growing are increasingly
> burdensome and not being made.
> Corn, soya, rice wheat may well go up in price but there is a dramatic
> social cost to be paid, sometime.
> Peak oil, peak gold are of little consequence when compared with
> peak soil, peak food.

Nov 15 06:36 PM

[prairiedog555:]

I don't know much about the global outlook for AG ect, but I live in corn, bean country, NE Kansas. And the author is correct. The wet weather is hindering harvest, and what is harvested has to be dried, driving up cost.
P.S. It is raining today 11-15-09 and will for 3-4 days.

Nov 16 05:01 AM