We've seen a doubling of wheat prices over the past month thanks to fires in Russia, brought on by drought. Vladimir Putin just announced an export ban on all wheat for 2010. They've fallen over the past two trading sessions, but I think we're likely to see prices more akin to $13 a bushel (the highs of 36 months ago), than we are to see them at the recent 4 year lows of around $4 a bushel.
We know that - as with all agriculture commodities - wheat prices are something of a function of oil prices. That's borne out in the chart below, which shows a floor for wheat prices at about that $4 range (prices are quoted on the right in cents per bushel).
Average oil prices between wheat's 2008 highs and today are at about $72 a barrel. Previous to 2008, between 2001-2007, the average barrel of oil over that period cost about $40.
(You can see average annual oil prices going back to 1946 at this website.)
If $72 a barrel is the new average, then we can't realistically expect wheat to ever get back down below $3.50 a bushel as it was throughout the early and mid 2000s. Of course there's no guarantee wheat will continue to rise, either, but in this investment climate, finding assets that aren't likely to fall is a great way to preserve capital - which is the first rule of successful investing.
So how can you invest in higher wheat prices? Though prices are under pressure from Russia, and though China is the world's largest producer, the United States is still the biggest wheat exporter in the world.
So you don't have to look any further than Archer Daniels Midland (NYSE: ADM) - the largest publicly traded grower of wheat (and corn, soybeans, barley, etc.) in the United States.
I wrote about ADM last week too, in my issue about investing in American obesity:
This company produces corn along with dozens if not hundreds of corn products including, but not limited to corn syrup, starch, glucose, dextrose, sweeteners, corn gluten, feed and meal, distiller's grains, corn germ, alcohol, amino acids and other food and animal feed ingredients - and so on.
This company regularly redefines the American diet by finding out new ways to consume ever-more amounts of corn. You might think that our stomachs can only handle so much corn, but according to the USDA the average American consumes 700 kg (1540 lbs) of corn every year.
So buying ADM isn't just a play on higher wheat prices, but rather, a play on higher agriculture prices in general - and simply put, ADM is the biggest and best agriculture company on the block. The stock is a little more expensive than when I recommended it last week, but its trailing PE is still pretty cheap at about 10 times earnings. At this point, however, I'd wait for any dips to build a position. Buy this stock when it's cheaper than it was the day before, collect the 2% dividend, and wait for the inevitability of higher oil prices to end up at the bottom line of higher agriculture prices.
Disclosure: I currently don't own ADM.