Friday, August 10, 2012

Corn price as high as an elephant's eye — but beware

I wonder how long before the price takes to collapse? Aivars Lode

Clients looking to cash in on grain's rising price could come a-cropper, experts say
August 10, 2012 3:01 pm ET
The best-performing commodity this year may be golden, but it isn't gold.

Suddenly, a hot commodity

The price of corn hit an all-time high Friday as the Agriculture Department cut its forecast for this year's crop by 16.9% to 10.7 billion bushels. Analysts were expecting just over 11 billion bushels. Corn futures were trading at $8.4375 a bushel on Friday, up from $5 in mid-May.
The lowered expectations are the result of the severe drought in the Midwest, which could be the worst since the Dust Bowl days of the 1930s. Now there's a lot of uncertainty around just how much of the corn crop in the ground will survive to be harvested. “The market's on edge right now,” said Dave Kavanagh, president of Grant Park Funds.
The Teucrium Corn ETF (CORN) has been the biggest beneficiary of the rise in prices. The exchange-traded fund, which invests in corn futures contracts, is up 21% so far this year and up 41% over the past three months. By comparison, gold is up only 2% over the last three months.
While there definitely is an opportunity for more short-term gains from taking advantage over this year's meager crop yield, the longer-term outlook for the grain isn't as bullish.
“The greatest cure for high prices," said Morningstar analyst Ben Johnson, "is high prices.”
The demand for corn, which is used in everything from animal feed, barbeque sauce, fuel, soda and bourbon, is likely to soften, thanks to the rising prices, Mr. Johnson said. Farmers, spurred on by the potential profit from high prices, are likely to be even more aggressive when planting next year's crops. That, in turn, should boost supply — assuming next summer isn't as dry and hot as this one, Mr. Johnson said.
While corn seems unlikely to keep up its blistering investment performance, there still is a case to be made for long-term exposure to agricultural commodities in general.
“This summer has really highlighted the global phenomenon that's going on,” Mr. Johnson said. “The world population continues to grow and is eating more and more.”
Emerging markets in particular have seen a steady increase in meat consumption, as the growing middle class demands a more Western diet, he said. The best way to invest in that long-term trend, however, isn't through the commodities themselves, Mr. Johnson said, but rather the companies that supply the commodities.
“The longer-term beneficiaries of these trends are the suppliers of the industry,” he said. That includes fertilizer companies such as Potash Corp. of Saskatchewan (POT), equipment suppliers, like Deere & Co. (DE). Of course, there's also an ETF for agribusiness exposure, the Market Vectors Agribusiness ETF (MOO). Yes, MOO.
Be warned, though, that equities tied to commodities can be swayed by stock market volatility as much as the price of commodities.

Sunday, August 5, 2012

Olson Global: CBOE Volatility Index (VIX) Approaching Long-Term Support

As I identified some time ago, dividend stocks will become increasingly more important. Aivars Lode

With July’s employment data posting largely mixed, but
better-than-expected results, the S&P 500 Index scored a nearly 26pt
gain on Friday to end the week at 1,390.99. That was its higher
reading since May 4 having jumped nearly 125pts since the beginning of
June. Moreover, the CBOE Volatility Index (VIX) of the S&P 500 fell
further last week and is now apparently taking aim at a retest of
long-term trend line support currently sitting at the 13.50 level.
Although day-to-day price swings continues to dominate, the general
trend of the S&P 500 Index remains positive. That being said,
prolonged uncertainty over the European debt crisis, the outcome of
this year’s presidential election and the inability of Congress to
address the “fiscal cliff” issue until (realistically) after the
November elections have passed has hastened a shift away from “risk”
assets in preference of cash, cash equivalents or intermediate-term
fixed income instruments by a number of investors. That same
uncertainty has resulted in a shift toward dividend paying stocks
within equity portfolios. As a consequence, retirees, pension funds
and yield seekers who are in need of an income stream have been forced
to accept lower rates of return on bonds and lower dividend yields on
stocks. In turn, that has resulted in higher prices being paid for
those assets. A byproduct of this shift has been the continuation of
impressive gains registered in bond prices and dividend paying stocks
at the expense of a number of growth stocks that have recently
suffered unexpected setbacks. In addition, the desire to preserve
capital by another set of investors has produced the phenomenon of
“negative interest rates” currently being offered on a number of
European sovereign debt issues. 
Interestingly, this unusual investment setup has created an
environment in which a bit of good news can trigger a sizeable daily
gain in equity prices, followed by a return to a string of modest
day-to-day retreats highlighted by a series of glum macro economic
forecasts. Since the VIX is often referred to as the “fear index”, and
given the inverse relationship it has with the direction of the S&P
500 index, higher equity prices accompanied by a decline in the VIX
could play out for the remainder of the summer. But as the November
elections approach, or if the European finance ministers find that an
intensified crisis of confidence begins to grow before then, a move
toward the 13.50 area on the VIX might prove to be a very attractive
Jim Donnelly, Olson Global Markets