My jaw hit the ground last week when Eric Bolling, of CNBC’s Fast Money, stated that his agriculture play was up 59% year to date. It hit the floor a second time when he mentioned how he was playing the sector. I have been trading commodity stocks for awhile primarily gold, energy and base metal producers. The soft commodities (coffee, sugar, grains) have caught my attention on occasion. However, I couldn’t figure out how to trade them via the stock market and I wasn’t interested in the futures market.
Jim Rogers stirred my interest a few years ago when I read his book “Hot Commodities.” He made it quite clear that we are in the midst of bull market in all “real things” not only oil, natural gas, and metals, but also wheat, corn, soybeans, etc. However, Rogers cut his teeth as a commodity trader. He believes that the best way to participate is to buy the underlying commodity (futures) or a commodity index fund. Since futures are not for me and mutual funds are right up there with watching paint dry, his book didn’t provide any implementation insight that I could leverage.
Bolling’s trade was exciting, because it is perfect for stock traders. His play is Monsanto Company (NYSE:MON), a seed producer, Agrium Inc. (AGU), a fertilizer supplier, Bunge Limited (NYSE:BG), a grain and seed processor and Deere (NYSE:DE), a farming equipment company. The premise is that higher commodity prices allow farmers to spend more money on new equipment, higher yielding seeds and better fertilizers.
I really got excited when I realized that these stocks exhibited similar characteristics to metal and oil producers. The beauty of metal and oil producers is that their costs are essentially fixed. In theory, as the price of the commodity increases the increased revenues flow directly to their bottom-line translating into higher stock prices. For some reason, this hasn’t worked very well for gold miners over the last year or so. Gold company after gold company has reported disappointed earnings although Gold prices are higher. A common excuse has been that their input prices (primarily energy) have outpaced gold prices. Interestingly, base metal miners haven’t had this problem.
The agriculture stocks exhibit similar leverage. As the price of corn, soybeans, etc. goes up, so do their profits. On Friday, spurred by a record corn planting season Monsanto increased its fiscal 2007 earnings outlook. Agrium said Monday it expects second-quarter results to reach or beat the high end of its outlook. Take a gander at these charts. It will bring tears to your eyes - if you are on the outside looking in (like me).
I’m not sure when Bolling first mentioned this play, but it looks like I paid a serious price for not being a regular viewer of Fast Money. Actually, I paid a price for not digging in and thinking the soft commodity play all the way through. I have been printing money for the last three years with a basket of stocks that leverage the industrialization of the emerging markets. In that case, early on I identified a “not so obvious” common denominator (base metals) and have profited. To make serious money in the market we must identify and capitalize on trends before it is broadcast on CNBC.
The good news or the bad news based on your perspective is that prices are not coming down anytime soon. We can give the government some credit for that. Ethanol, corn based in the United States, is a mandated additive to gasoline. This has created an additional demand factor for corn, thus driving up its price. So, it looks like Bolling’s agriculture play has more legs. However, the easy money has been made.