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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 occasions. 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 (MON), a seed producer, Agrium Inc. (AGU), a fertilizer supplier, Bunge Limited (BG), a grain and seed processor and Deere (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. As the price of corn, soybeans, etc. goes up, the profits of the agriculture stocks accelerate. 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 when I read Roger’s book. I have been playing it right for the last three years with my Big Build-Out basket of stocks. It leverages the industrialization of the emerging markets. In that case, early on, I identified a “not so obvious” common denominator (base metals). Now not a day goes by when we don’t hear about rising commodity prices due to China or India’s need. To make serious money in the market we must identify and capitalize on trends before it makes CNBC. The good news or the bad news based on your perspective is that prices are not going 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 for corn. Additionally, the diets of people in the emerging markets are improving as they become more prosperous. These factors have led to higher prices and show no signs of subsiding. It looks like Bolling’s agriculture play has more legs. However, the easy money has been made.
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INFORMATION Michael Dawson recently said goodbye to a 20-year career in Engineering, Marketing and Sales to focus on living his dream of financial independence as a full-time trader on his on account. He has also established a financial education company, The Time & Money Group, to encourage others to pursue financial freedom and is publisher of the company's blog "Breaking the Shackles of the 9 to 5." His mantra is "Why trade time for money ... when you can have both." The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
