This Could Be Our Last Shot At
Cheap Grain
by Tom Dyson
August 17, 2006
The globe is wrapped in drought.
In the USA, the worst drought since 1988 is destroying crops and shrinking rivers in the Midwest. Missouri hasn’t had any rain in eighteen months.
Barge operators in the Mississippi have had to reduce loads so their vessels don’t scratch the bottom of waterways. Water utilities are dredging rivers to remove mud. And analysts said last week that U.S. wheat stocks would fall to their lowest levels in eleven years.
Scientists at the U.S. Geological Survey, in a July 9 article on MSNBC, are saying that water levels in the Colorado River are well below those of the Dust Bowl years... and that the drought in the West could be the worst in 500 years.
In China, 17 million people are without access to drinking water after a searing heat wave and three months without a drop of rain. Pictures of trucks delivering water and villagers digging wells are seen all over state television. The Yangtze River hit its lowest level in 100 years. Crops have withered over large tracts of farmland in the Sichuan province. Economic losses are close to one billion dollars.
Europe is feeling the heat wave too. Here’s how the Financial Times described it earlier this month:
“As Europe wilts under a blistering sun, water levels in the region’s rivers and reservoirs are plummeting. The night skies over Spain’s forests glow orange with deadly wildfires. Cracked mud-flats border shrinking waterways. Fish lie stranded on the dry beds of lakes and rivers.”
And a headline in the New Zealand Herald reports withered crops in Australia this year. “Drought may cut Australia's wheat harvest by as much as 28 per cent.”
Agriculture is a frequent theme in DailyWealth. I even touted the grains as one of my favorite long-term investments. Here’s why:
Unlike other commodities, grain prices are stuck in a ten-year trading range. And when you adjust for inflation, grain prices are at their lowest point in history. Meanwhile, the costs of farming are soaring... gasoline, equipment, fertilizer, land prices, water supply... all of these inputs are squeezing farm profits. We got this email from a farmer recently:
“We have a 365-acre farm in Arkansas. In 2005, the price of everything skyrocketed, like: electricity for the wells to irrigate, diesel for the relift to bring water out of the bayou, fertilizer, seed rice, everything was up double and triple. Our part in gross was $70,000, but by the time all expenses were deducted, our profit was $5,000. By the way, we also had to sink a new well, which was $13,500. Things are bad for the farmer and inflation is here, big time.”
As farmers are forced out of the business, supplies decline.
Demand, on the other hand, should grow and grow. Did you know that anything produced on a farm can be turned into fuel for automobiles? It will be one of the most important economic themes of the future: The battle between your stomach and your car. I’ll write more on this idea in future issues, but for now, I just wanted to show you why I’m so bullish on crops...
Which brings me back to the droughts.
Droughts reduce supply. They are bullish for crops. The thing is, if you’re reading about them in the national newspapers, like we are this month, then it’s too late. “The culmination of a bull market comes at a time when the crop shortage receives front page comment in our daily papers,” explains Ralph Ainsworth in his 1933 book, Profitable Grain Trading.
Secondly, grain prices are falling off. Corn and wheat are both off around 15% since May. When good news can’t rally the market, as the saying goes, it’s bad news.
Putting everything together, I don’t think we’ve seen the low point in crops yet this year. This is good news for us... a sell off would be a great buying opportunity. It may be our last chance. Don’t miss it.
Good investing,
Tom
P.S. As the bull market in agriculture advances, they’ll think up lots of new investments for us to play with. But at this point - early investors that we are - the futures market is the only direct way to speculate on grain prices. Next week, I’ll show you how. Keep reading DailyWealth!
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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