Commodities Climb Higher
Research for Online Investors

by John Dalt

2/10/11

Adept traders have played a rise in global grain prices over the last few months.  Australia experienced flooding that has affected their mining.  This has driven up the cost of coal and many of our holdings in mining companies in the long-term and covered call portfolio.  The flooding in Australia came after the fires in Russia last fall that saw wheat crops destroyed.

News out of China yesterday should support higher agricultural product’s prices.  China is in the middle of a drought.  The United Nation’s Food and Agriculture Organization said the drought is “potentially a serious problem.”  Rains have been sparse for four months, and according to the U.N. are affecting 35% of the country’s wheat crop or 15.8 million acres.  Additionally, over 2.5 million people and 2.8 million head of livestock are facing shortages of drinking water.

China News reports that the Minister of Agriculture, Han Changfu is urging measures to minimize the impact of the winter drought as it may continue into the spring.  The Agriculture minister said the drought has affected over 42% of the nation’s wheat growing regions.  Han said there is adequate water available for irrigation.  The government is offering subsidies for purchase of irrigation equipment and raising the government’s minimum purchase price of grain.

Beijing had their first snow of the winter this week.  The late arrival represents the longest winter drought for the capital city in sixty years.  The light snow amounted to only one-half inch of precipitation.  Beijing is at roughly the same latitude as Indianapolis, Indiana.

Last night Premier Wen Jaibao held an executive meeting of his cabinet and pledged $1 billion dollars in measures to increase grain production.  China is the world's largest wheat producer.  The drought has affected winter wheat production and could now start to harm summer wheat.  China is self sufficient in wheat, but may have to import wheat if crop production falls.  World wheat prices have risen 35% since November.

China faces another problem with agriculture production.  Farmers around cities want to see cropland sold for real estate development.  They view farming as hard work with little reward.  If the ground they farm is taken for development, they receive “removal compensation.”  Then they can move to the city and take a higher paying job.  Around the city of Nanjing only 10% of the total farm land has been used for sowing rice.  Most of the land around Nanjing has been sold to city people to grow vegetables and chufa.   Chufa is a grass like plant that has an underground seed that is edible, like a peanut (tigernuts).

Drought in key agriculture regions, flooding in others, idle productive farmland all make us believe higher prices for grains may continue.  It is also important to remember that commodities are priced in dollars for our market.  The Federal Reserve is applying pressure to the dollar’s value to make our exports more competitive.  This adds juice to the commodity boom for dollar based investments.  We believe commodity prices could continue higher, but watch weather news.  A forecast of rain in China could change markets while you sleep.

You can investigate agriculture ETF’s on our ETF List page, some of note are DAG, MOO, JJA and RJA.

To the mailbag:
Thanks for providing the Nokia email.  I believe Mr. Elop has his fingers on Nokia’s problems.  I was a loyal Nokia owner until last fall when I upgraded to an Android.  Because of the Android’s ease of use we now use gmail for our company.---subscriber A.A.

John’s reply:  I owned a Nokia for years.  Tough and reliable.  Tomorrow’s meeting may see an introduction of an MSFT partnership.  Nokia can come back, they have great world-wide reach.  This points out the importance of leadership, like Steve Jobs has given Apple.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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