Doubling Up on The Agriculture Boom

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Here is the reality. If you are looking to hit home runs, stocks — both U.S. and global — are a tough place to do that in the current market environment. You can be holding the stocks of some of the finest companies in the world but with market sentiment so negative, the baby goes out with the bathwater. This is a time when you must concentrate your bets on those few areas where you see there are bull markets. And you can be sure that I am working hard to uncover all of the top opportunities across all asset classes, wherever they may be on the globe.

This week’s Global Bull Market Alert pick doubles up your bet on one of the few, strong bull markets in the world — the boom in agricultural commodities. You already have exposure in this area through the Powershares DB Agriculture ETF (DBA). Since you took your position in DBA on Jan. 22 only three weeks ago, this ETF(exchange-traded fund) is already up 10.88% — and the options are up 62.71%. Equally important is that this is a continuation of a steady bull run, not just a lucky, short-term bounce. This week’s pick doubles up that pick by recommending that you increase your exposure to this area by buying a slightly more diversified pick, the iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA).

Here is a quick reprise of the investment case for agricultural commodities. While the rally in hard metals may be vulnerable to a global economic slowdown, the prices of soft commodities like corn and wheat seem to be hitting a record high almost every week.

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What’s behind this global trend? Blame the law of supply and demand. On the demand side, the appetite for soft commodities is exploding across the planet. Twenty years ago, three out of four people on planet earth were living on a mere 1,600 calories a day. Today, two billion people of the emerging middle class are eating a lot more like us.

On the supply side, global inventories of soft commodities haven’t been this low since Richard Nixon was president. China has lost fertile land equivalent of about the size of Maine each and every year for the past decade. To feed its population adequately, it should be adding that amount. 

The global shift toward biofuels only exacerbates the problem. With corn-based ethanol the latest, government-subsidized rage, demand for crops to be used as biofuel is set to double by 2030. Today, one out of five bushels of corn produced in the United States is going toward ethanol.

How does this week’s pick differ from PowerShares DB Agriculture (DBA)? While DBA consists of an equal weighting of agricultural futures contracts in wheat, soybeans, corn, and sugar, iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA) has exposure to these same grains, but also invests in cotton, coffee and sugar. And it is an ETN (exchange-traded note), not an ETF, which implies a difference in credit risk as well as tax treatment of certain gains. Neither of these issues should impact your investment decision.

So buy iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA) at market today and place your stop at $54.80. Sadly, there are no options on this one.

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PORTFOLIO UPDATE

Your existing bet on agricultural commodities is your top performer in your portfolio, with DBA up 10.88%, and the options now up 62.71%. I’m a firm believer in this theme, so I am recommending that you hold onto both the shares and options for further gains.

The good news is that your position in the UltraShort FTSE/Xinhua China 25 Proshare (FXP) is now up 18%, and the related FXI options are up 41.3%. The bad news is that given the 2x leverage on this ETF, your gains should be MUCH higher. There is something rotten with Proshares, because this ETF is simply not providing the 2x leverage it is claiming to investors. Over the last three months, FXP has simply provided the equivalent of an unleveraged short return on iShares FTSE/Xinhua China 25 Index (FXI). Sadly, FXP is still the easiest way to short the overvalued Chinese market. So let’s hold on to this volatile play for now. Tighten your stop $66.00.

Our two currency bets, the CurrencyShares Japanese Yen Trust (FXY) and our short position on the British Pound Sterling, CurrencyShares British Pound Sterling Trust (FXB), are broadly flat — with the British Pound falling sharply on Thursday after the Bank of England cut interest rates. Both still offer 10-15% upside during the next few months.

Our single, “traditional” bet — HDFC Bank Ltd. (HDB) in India — continues to be buffeted by negative global sentiment, despite the bank’s positive fundamentals. Although you have not hit your stop on this one, I’m recommending you close out this position at a loss, and put your money to work in this week’s Global Bull Market Alert pick. This will complete the shift of the Global Bull Market Alert portfolio to fully defensive mode.

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