The Next Big Bull in Grains

| About: iPath DJ-UBS (JJG)
This article is now exclusive for PRO subscribers.

Booming demand from emerging markets, crop failures and bad weather have dramatically boosted grain prices. Still, in real terms, they are cheap.

And now they are set to head higher as we enter important seasonal plantings in Russia, Canada and the United States. Projected harvests in 2011 in most grain-growing countries are sizable. And demand is forecast to outstrip supply.

This trend is likely to persist for many years, creating a great long-term opportunity for commodity investors to profit. And there’s a new grain that’s going to take the lead.

Corn has Skyrocketed Since Last Year

The United States Department of Agriculture (USDA) reported last week that American farmers plan to boost corn plantings by 5% this year. That is the largest acreage of corn in four years; the second-largest since 1944.

Over the past 12 months, corn prices have gained 122%, leading the charge in the grains bull market. Bran is up 113%, soybeans are up 49%, and oats and wheat prices have almost doubled.

The grain-chain affects not only bread, cereals and other related products, but also dramatically impacts beef and pork prices. Cattle feed, which is largely comprised of corn, has skyrocketed since last year.

Lately, corn has been all the rage in the financial press and commodities pits. China’s growing corn imports, after years of being an exporter, and soaring global demand – all against the backdrop of flat corn harvests – spell a corn “squeeze” this summer.

Now Wheat Is About to Join the Mania

Farmers also plan to boost wheat plantings by an additional 8%. Farmers everywhere, including those in China, are starting to replace expensive corn with wheat to feed their animals.

Russia, the world’s fourth-largest wheat exporter, imposed a ban on wheat exports last year following the worst drought in more than two decades. The ban is supposed to end on June 30. But rumors in Russia are circulating that the Kremlin will extend the export ban for several more months until the Russian wheat spring planting is completed (bad weather in the food-belt has already caused delays.)

According to the Russian Grain Union, Russian harvests are expected to top 86 million tons this year – 41% more than last year. Yet private forecasts expect the country to extend its export ban because weather this summer might be erratic, thereby reducing expected crop yields. That sets the stage for another move up in grain prices – only this time, wheat might lead the next stage of the grains rally.

For most investors, playing the bull market in wheat isn’t that simple.

How to Ride Wheat

In the United States, no exchange-traded-funds or exchange-traded-notes exist specifically to trade wheat.

But retail investors can buy the iPath Dow Jones-UBS Grains Total Return ETN (NYSEARCA:JJG). This exchange traded note, which invests in commodities futures, holds about 24% in wheat and 38% each in corn and soybeans. JJG is liquid with increasing volume since last summer and trades more than 25% off its all-time high almost three years ago.

Wheat is going to join corn in the triple-digits soon. I suspect global demand will continue to increase this year and harvests, even if above expectations, won’t be enough to offset demand.

This ETN is the easiest and best way to play the grains. My forecast is a 25% return over the next 12 months, possibly more.

There is another way to trade wheat – on the futures and options exchanges.

My colleague, Andy Hecht, has more than 35 years trading commodities on Wall Street. And he and I share the same views on commodities. Though certainly more speculative than an ETF, options and futures are an effective way to profit from commodity market volatility.

Andy can show you how to structure trades in such a way that not only limits your losses, but allows for potential profits of 100% or more in relatively short time periods. You’ll be hearing more from him in the coming weeks and months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.