Six Ways to Cash In on Wheat

by: Investment U

By Tony D'Altorio

The price of wheat recently made its largest one-month jump in more than three decades. With global demand soaring and production tanking, wheat really has become the “golden” grain. And at the heart of the crisis is the weather in Russia, Ukraine and Kazakhstan.

Farmers in the grain belt stretching from the Black Sea to Siberia know to expect hot summers. But this year’s heat wave and drought are the worst they’ve experienced in over a century. Those conditions have led to devastating wildfires, which have destroyed too much of the grain crop. Russian grain forecasts have gone from bad to worse over the past few weeks.

Wheat traders and analysts now estimate that Russia’s wheat production could drop in the 2010-11 season to a mere 45-50 million tons. This would mark a 27% drop from last season’s 61.7 tons, and the lowest amount recorded in five years. Worse yet, Russia might not even be able to sustain its own consumption level of 47 million tons. Well aware of that possibility, it has already banned grain exports from August 15 through the end of 2010. Close by, Ukraine and Kazakhstan will probably follow suit sooner than later.

The Wheat Shortage’s Wide-Ranging Effects

Wall Street has an ample supply of optimism concerning many commodities. But Russia’s weather problems have exposed the fragility of world food supplies, which will almost certainly lead to higher prices for bread, flour and beer. Morgan Stanley’s Joachim Fels says, “Soaring grain prices have brought food inflation back to center stage.” Corn, soybeans, barley and rapeseed have already jumped sharply. This wider rally reflects other risks than just the immediately obvious ones.

For instance, lower supplies of wheat, which many livestock feed on, will lead to higher demand for alternative animal feed such as corn. And food companies such as General Mills (NYSE: GIS) and Unilever ADR (NYSE: UN) will probably suffer as well. Many food industry executives foresee a rise in prices for flour-related products, such as bread. They worry that they might not be able to pass the total increased costs onto their customers.

Meanwhile, surging barley prices could push up retail costs of poultry and beer.

It All Rests on These Other Wheat Suppliers

Importing countries and food companies will now have to rely on outside sources for their wheat. Unfortunately, those secondary sources are having a few problems of their own.

Canada, one of the world’s largest wheat exporters, has gotten way too much rain as of late. That has prompted the Canadian Wheat Board to forecast a 36% drop in the wheat harvest. It now only predicts its 2010-11 crop to hit 18.5 million tons, down from last season’s 28.8 million tons, and the lowest level since 2002.

Europe isn’t faring any better, with either too much or too little rain, so it can’t be counted on either. And that leaves only the U.S. and Australia, since Argentinean farmers have given up on wheat. Struggling under government imposes restrictions, they switched to other crops, now growing less wheat than they have in 111 years! In fact, most industry experts think that at most, Argentina will export only 3 million tons this year, down from 10 million as recently as 2005.

Now the U.S. does have 30 million tons of wheat in storage. It exports half the world’s corn, a third of its soybeans and a fifth of its wheat. But even that won’t last too long, especially if the wheat storage crisis in India gets worse.

India, the world’s second largest wheat producer, can usually feed its enormous population. Problem is, at least 17 million tons of its 59 million tons of stored grains are kept in uncovered facilities. And heavy monsoon rains could rot much of that away, reducing global wheat inventories even further. In other words, the U.S., Australia and Argentina have to have bumper crops. Or else.

The weather will be critical as the year closes, since the latter two harvest their wheat in December. And Australia is already experiencing weather problems. Traders and analysts say there are enough stocks to bridge the gap left by Russia. But there is no safety cushion whatsoever, so everything has to go perfectly.

Play the Golden Grain for All It’s Worth

Interest in Australia and Argentina’s crops have generated activity in their agricultural companies. For one, investors have bid up shares in Argentina’s Cresud ADR (Nasdaq: CRESY) recently.

Also motivated by such events, GrainCorp (PINK: GRCLF.PK), one of Australia’ biggest grain handling and storage companies, just paid $769 million for AWB, the country’s largest wheat exporter. Sector-wide, merger and acquisition activity looks set to pick up, giving investors a good chance to get in.

In particular, Market Vectors Agribusiness (NYSE: MOO) and PowerShares Global Agricultural Portfolio (Nasdaq: PAGG) look good. Both ETFs offer broad exposure to the agricultural sector.

And as I mentioned last month with wheat prices on the rise, the Elements MLCX Grains Index ETN (NYSE: GRU) and the Barclays iPath Dow Jones-UBS Grains Subindex Total Return ETN (NYSE: JJG), still look good as well.

With long-range weather forecasts predicting no change in weather patterns for at least another month, these investments are sure to grow.

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