Our Take on the Sudden Commodities Rally

by Addison Wiggin & Ian Mathias

  • Softs soar… The 5 chronicles the remarkable summer rally for coffee, corn, sugar, cotton and wheat

  • Chris Mayer delivers bad news… why you might want to reconsider investing in Brazil entirely

  • Another government-mandated disaster: Global helium supply on track to disappear in 25 years

  • Agora Financial analysts deconstruct Bernanke’s big speech… our thoughts and market reactions, below

 

  Today’s 5 begins with an abominable horror: The world’s most valuable commodity has soared to its highest price in a generation.

Coffee futures are approaching a 13-year high of $1.88 today.

And the case for more expensive coffee is growing stronger every week: Columbia had a smaller-than-normal harvest last year, and dry conditions in Brazil this year have pinched supply even tighter. Demand for this delicious, addictive stimulant is (naturally) growing.

Thus, stockpiles at Intercontinental Exchange-certified warehouses are down 35% this year and swill makers like Maxwell House and Folgers have already raised prices by 9% and 10%, respectively. Starbucks announced recently that it will eat the costs, which will amount to roughly 4 cents a share.

Retail prices would have to rise a whole lot more than 10% for either of your 5 Min. editors to even consider switching to something as silly as… tea.

  Food prices are about to get a huge boost, too. But not in what we’d like to think of as a productive way.

“Brazil screwed it all up,” Chris Mayer laments by way of giving us an explanation. Last week, the Brazilian government let loose a sudden, “immediately binding” mandate that effectively outlawed all foreign ownership of domestic farmland… eerily similar to the Zimbabwean farmland coup.

“Worse,” Chris continues, “the legal rules are so unclear that all such acquisitions since 1988 could be null and void, with the land returned to nationals. I can tell you from talking to people down there in the last few days — including attorneys — that local businesspeople are not dismissing that possibility.

“Blame politics. It is an election year in Brazil. The country will vote for a new president on Oct. 3. All indications are that it will be Dilma Rousseff. She is one of the ones who have been highly critical of foreigners buying Brazilian land. "Brazilian land for Brazilians" is the chant.

  What a boondoggle.

In April alone — the latest data available — foreign investment in Brazilian agriculture was $26 million — up 225% from a year ago. Between 2002-08, foreign investors poured nearly $2.5 billion in land alone.

And there are some public funds that probably won't go forward now. Agrifirma raised $189 million and planned an IPO. Macquarie has a fund they set up, and they were to raise as much as $600 million.

“The new rules will freeze agricultural investment in Brazil. This is big news for global food markets because Brazil was such a key part of the equation. Brazil, as I've pointed out, is the world's arable land bank. This is where we'd get the added food supply the world needs.

“The implications will echo far beyond the borders of Brazil. It will have an impact on the world's future food supply and on food prices. And it also raises broader questions about investing in Brazil at all.”

[Ed note: Chris was scheduled to lead an investment tour to Brazil this month, but all the farmland projects he was lined up to see have been put on hold because of this mandate. We'll keep you posted on further developments.]

  And yet another commodity is suddenly in rare supply: helium.

$1,092.96 of precious resources?

Cornell physicist Robert Richardson, a Nobel laureate, garnered some new attention last week when he warned the world will likely run out of helium in 25-30 years. Why? You might detect a theme in today’s 5… another bizarre government boondoggle.

80% of global reserves of this nonrenewable resource sit in the American Southwest, mostly in the National Helium Reserve in Amarillo, Texas. Under a 1996 law, that reserve is required to be sold off by 2015, regardless of global supply or market price.

Thus, helium is sold way below its market value, Richardson says, and is too cheap to recycle. As such, we’re consuming it far too flippantly (by government decree) and with little regard for dwindling supply. Should it run out, you can bid adieu to things like MRI scanners and anti-terrorism radiation monitors, among other things.

Ponder this at your next birthday party: To properly reflect helium’s scarcity, the professor reckons your typical party balloon ought to cost… $99.36.

  Indeed, it has been a hell of a summer for many soft commodities, especially given the S&P 500’s 2% decline since June.

On top of coffee’s generational run, cotton hit a 15-year high on Friday, thanks in part to the flooding in Pakistan. Sugar hit a five-month high earlier this month. Wheat rose 55% in the last two months to a post-crisis high of $8.41. Barley has followed suit, leading a likely rise in global beer prices.

Just this morning, corn found a 14-month high of $4.44 a bushel, which could very well result in higher prices in everything from fuel to livestock to sweeteners to ketchup.

  “Commodities are a world of opportunity,” our Chicago pit man Alan Knuckman commented from an undisclosed vacation spot in Mexico this morning, “a world that is truly governed by supply and demand, with constant concerns about potential upside price shocks.

“Agricultural commodities are especially susceptible to buying frenzies with any disruptions in the growing season or yields. The price declines from the financial crisis were overblown to the downside on an unrealistic halt in consumption.

“Most commodities have had a modest rebound with more upside gains in sight to just recover 50% of the drop from 2008 heights.

Coffee in particular is still a great deal off the 1977-1978 highs above $3.40. Prices move up and down seasonally and depend on the crop performance during the growing season. The price shock potential always exists if Mother Nature fails to cooperate with farmers.

With commodities, it is often not a matter of "IF," but rather "WHEN" major price moves will occur. With big moves come opportunity to profit. If you’d bought, for example, just one coffee futures contract when Alan wrote about it first, you'd be up $16,000 today, all profits.

Alan’s Resource Trader Alert readers have reaped the rewards of this summer’s commodity spike, selling half their sugar position recently for 187% gains while the other half has risen to over 309%. They cashed out on corn earlier this summer too, for an 83% return. If you’re interested in learning more, don’t wait… today is the last day of a great deal on RTA annual subscriptions. Details here.

  Stock market traders, meanwhile, are far more concerned with other matters… namely how the Fed will be manipulating their market next. Traders gave Ben Bernanke’s latest speech a vote of approval Friday, as the Dow rallied 1.7%.

If you missed his speech from the annual Federal Reserve Jackson Hole retreat, Mr. Bernanke gave a thorough rebuttal to those who claim the Fed is out of bullets to fire at the U.S. economy. In fact, they’ve got three more, he said:

• The Fed could resume long-term security purchases…

• Or lower the interest rates banks receive for storing money at the Fed (perhaps even charging them to keep reserves)…

• Or promise to keep Fed lending rates at 0% for a longer period than the market expects.

Feel better now? Economists at Goldman Sachs and Pimco are still giving 25% odds of a double-dip recession, no matter what the Fed does.

 

  “What happened to the recovery?” the intrepid Joel Bowman asks of Ben Bernanke. “What happened to the ‘substantial progress’ you had so earnestly forecast at last year's annual Federal Reserve retreat?

“On that very occasion, a year ago to the day, Bernanke spoke thus to the committee:

‘Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery… and prevent a recurrence of the events of the past two years.

'I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress.’

“The inability of Mr. Bernanke — or anyone else, for that matter — to hold back the tide of necessary correction ought to be obvious to all.”

  Or not. Personal spending increased 4% in July, while personal incomes inched up just 2%. That’s a trend all too common prior to the Panic of ’08.

Savings rates in July dropped from a 12-month high of 6.2% to 5.9%.

  After Ben Bernanke’s speech on Friday, the dollar index sunk below 83 while gold shot above $1,240. Both forms of money have since returned to their pre-speech levels.

 

“The Fed chair’s speech made it clear,” says veteran options trader Steve Sarnoff, “Bernanke and crew are setting up QE2 (another round of quantitative easing) to offset deflationary forces with inflation. This strategy sacrifices the U.S. dollar and is a main reason why the Midas metal is in demand.”

  Bloomberg’s case against the Federal Reserve for increased transparency will likely go to the Supreme Court. A federal appellate court ruled in Bloomberg’s favor last week, another step in their quest to force the Fed to release the details of their bank loans during the credit crisis. The Fed will thus have one last appeal with the Supreme Court… we’ll keep you in the loop.

Of course, in the meantime, don’t expect any useful information. The day after losing their latest appeal, the Fed filed for a stay… essentially a delay of the court’s ruling until their appeal can be heard again.

  Gasp. The FDIC didn’t close a single bank on Friday, their first weekend off since the Fourth of July.

Indeed, Lakeside Bank of Lake Charles, La., this morning became the first new bank of 2010. In stark contrast to the 151 new banks and thrifts formed in 2006, the tiny Louisiana startup is the one and only bank established from scratch and blessed by the FDIC so far in 2010.

Lake Charles seems to be doing just fine, growing despite the recession, thanks to local casinos, liquefied natural gas terminals, oil drillers and a new plant that makes parts for nuclear reactors.

Thus, Lakeside Bank has clients at the ready and is open for business… out of a double-wide trailer.

  “This talk of nudging the age of retirement up,” writes a reader “until it’s conceivable that eventually nobody can retire makes me think of something I kept hearing in Shanghai this summer.

“Everybody would say, ‘It’s hot!’ Got up to 39 degrees (Celsius) today. It was always 39 degrees, not 40 or 41. Later, I learned that it never will get over 39 degrees C because they have a law that says that if it’s over 39 degrees, nobody has to go to work. So you don't have to worry about it getting too hot, because it’s not allowed.”

The 5: Heh. We heard that one in Beijing in May, too.

  “I guess Mr. Simpson ” a reader writes, apparently unhappy with Alan Simpson’s description of Social Security beneficiaries, “wants everyone to ignore the fact that he is one of those bigger teat suckers. He is sucking in over $170,000 per year in congressional pension benefits, paid for by the very people he is insulting, even though he did not have to pay a dime to get that, and you can safely bet that due to his government position and contacts, he never has to reach for his wallet, no matter how expensive his health care.

“He is just another one of those government whores who has been insulated from the real world by his government positions for decades, yet perceives himself as one who deserves to tell everyone else what they should do or what they should have.”

  “I read the lists where future jobs would come from,” writes another reader, “and believe them to be very good possibilities if only the government would get out of the way.

“Under previous administrations, trickle-down economics came from the private side of the economy from profit-motivated companies willing to compete for the best product to introduce. This government practices trickle-down economics from the government side, which is not profit motivated nor motivated to compete, and essentially breeds corruption, in my opinion.

“The uncertainty plaguing our investments is government driven — period. Our country is losing the competitive edge to third-world countries due to bad policies and at the worst time in history.”

The 5: Indeed, you’ve tapped into the very subject of our next documentary. Gracias.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S. If you’d bought two coffee futures contracts when Alan Knuckman wrote about them, you'd be up $32,000 this morning. That’s good money.

After midnight tonight, Alan’s presentation on trading these futures and making money in commodities as a whole will no longer be available. Neither will our limited-time discount on Resource Trader Alert. Please, take a short moment and review the presentation, here.

 

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