|Home||About Us||Resources||Archive||Free Reports||Market Window|
Wednesday, May 7, 2008
Last night, I had dinner with Gary, an Iowa commodities broker...
As we sat down to steaks, Gary told me two large hog businesses had gone under this week in Sioux City. "I saw the banker down at the farm counting [livestock] heads," he said. "The banker in this town never leaves his office. It's the first time he's ever had to get s**t on his shoes."
Gary lives in one of Iowa's most productive farming counties. He helps local farmers sell their harvest using the futures and options markets in Chicago. He also makes million-dollar speculations of his own.
Gary really knows the "ag" markets. He used to be the head stock buyer in a cattle yard, he's traded ag commodities every day for the past 40 years, and he spends all day talking with farmers.
The last time I met Gary – in November 2006 – he told me this:
"Corn is going to $5 a bushel, up from its current price of $3.33. Soybeans are going to $9, from their current $6.45. And Iowa farmland is a bargain at $5,000 an acre."
Today, corn is $6 a bushel, soybeans are $13, and prime Iowa farmland is $10,000 an acre.
Back then, it was obvious grain prices had to rise. They were too cheap, and with the ethanol boom in full swing, it was plain to see corn and soybean prices would rise. Now it's not so clear...
Gary says a bad crop could send corn to $10. But that's not likely. The farmers are planting their fields right now, and Gary thinks there's going to be a big crop this year. That could push grain prices down.
Gary wouldn't predict a fall or a rise in the grain markets. He can't know the future. But he did tell me he had sold all the grain production from his own farm, locking in corn prices at $5.80 and soybean prices at $12.80.
While it isn't clear what's going to happen to the grains... Gary said hog and cattle prices have to rise. Here's why:
A knife is made out of steel. The knifemaker simply turns a raw material into a more expensive "value added" product. The hog and cattle farmer does the same thing. Corn is the raw material. Hogs and cows are a value-added corn product. Think of livestock as corn bins with four legs.
When steel prices rise, the knifemaker has to raise his knife prices or he'll go out of business. Farmers haven't been able to raise hog and cattle prices. Years of cheap corn have built up large inventories of meat.
Now the hog and cattle farmers are going out of business. Soon there's going to be a shortage and prices will rise. "There's going to be drastically higher meat prices when all this washes out," Gary said.
To invest directly in hog and cattle prices, you have three choices: You could make friends with a farmer and ask him to buy livestock for you. You could open a futures trading account and buy live hog or feeder cattle futures. (Prices are volatile. Make sure you use plenty of margin and retain a broker who knows the agriculture markets well.)
Finally, you can buy a publicly traded meatpacker like Tyson, Hormel, or Smithfield. But be careful... other "corporate" variables may influence the prices of these stocks and ruin the trade, even if livestock prices rise.
THE MARKET LIKES COMMERCIAL REAL ESTATE AGAIN
On July 16, 2007, we sounded the alarm on commercial real estate stocks... aka REITs. We cited record low yields and high valuations as reasons for avoiding – or even shorting – the sector.
It didn't take long for the market to prove us right... After that column, REITs in general fell 25% in six months. Shares of America's largest REIT fund manager, Cohen & Steers, were cleaved in half during the drop. After all, if folks don't want to own REITs, they don't want to own the guys who own REITs either.
As today's chart shows, investors are warming back up to the sector. C&S has built a solid "floor" in the $25 area and sits at a six-month high. Rallies come on strong volume, corrections come on weak volume. CB Richard Ellis, the world's largest real estate services company, sports a similar chart.We can't know what the future holds for U.S. commercial real estate. Times could get worse. Times could get better... The renewed strength in Cohen & Steers tells us the forward-looking stock market likes the "times are getting better" thesis.