Agricultural Offers You Two Opportunities Insulated from the European Crisis

As usual, the market’s focus was squarely on Europe last week, where announcements of the Spanish budget for 2013 and the bank capital short fall were mostly in line with expectations. As a contrarian investor, however, I am constantly searching corners of the markets across all asset classes trying to find opportunities. To that end, Grains was one of the biggest movers at the end of last week … up sharply on Friday.

The catalyst for the big rally: The USDA’s Quarterly Grain Stocks report. As you can see in the table below, the stocks for corn and wheat were much lower than the market had anticipated.

Furthermore, corn stocks for “old crop corn,” which is corn that was grown this summer, were 17 percent lower than last year. Old crop soybeans were down 21 percent from a year ago, although the numbers were higher than expectations. And wheat was down 9 percent from last year.

That tells me we’re almost guaranteed elevated grain prices for months to come!

These higher prices have several offshoots:

First, it’s potentially bullish for the agribusiness sector, mainly seed companies and fertilizers, like Million-Dollar Contrarian Portfolio holding Monsanto (MON), and to a lessor extent the agricultural machinery companies.

The reason it’s not as bullish for the machinery companies is because it’s not clear if total crop receipts will be higher this year, given the small crop coming to market. Crop receipts are highly correlated to machinery replacements, so there is some uncertainty there.

The Market Vectors Agribusiness ETF (MOO) is one way to play the sector, as it’s weighted more towards fertilizers and seed companies than machinery.

Higher grain prices are bound to push cattle and hog prices skyward.

And second, since any hope of a break from high feed prices was dashed with the quarterly grain report, we can expect ranchers and farmers to continue thinning cattle and hog herds, which should be bullish for cattle and hog prices longer term.

You might consider looking at the iPath DJ-UBS Livestock Subindex Total Return (COW). This ETN is made up of 60 percent cattle futures and 40 percent hog futures.

Bottom line is that higher grain prices are here to stay, at least for the next several months, and those fundamentals offer opportunities somewhat insulated from the European crisis.

Best,

Tom