Buy the Grains, Agriculture on Pullbacks; Corn the Hottest Crop

Montreal, Canada

Investors should focus on building their positions in agriculture and energy as the next correction unfolds. Both sectors are near-term over-bought and might have already started a consolidation process since the beginning of March.

Over the next several years, agriculture will dominate the commodities markets similar to base metals and precious metals since 2003. And the energy sector will deliver superior returns spearheaded by the oil services or drillers.

But if I had to make one gamble and bet the farm, it would be agriculture.

Since the Fed’s QE II announcement last fall, most commodities have rocketed higher and not just because of the Fed’s liquidity rush and extended period of low interest rates. Supplies for many commodities have turned into net deficit over the last 12 months – mainly because of poor weather and disappointing crop yields.

This phenomenon – or crop destruction — has marginalized grain harvests since mid-2010 and might result in even higher prices, if Mother Nature doesn’t cooperate this year in important grain-growing regions like North America, Ukraine, South America, Australia and Southeast Asia.

Rice Yields and Rising Prices

Right now, the only widely harvested crop that remains plentiful is rice.

Prices for Thai rice peaked almost three years ago and remain more than 50% off their highs. One bad harvest in Southeast Asia (Thailand, Vietnam) and rice prices will take off. The odds of this happening are pretty good because weather patterns (climate change) are increasingly volatile combined with falling water tables worldwide. Rice is the most popular staple in Asia.

I’m looking to build fresh positions in the grains and the entire food-producing chain later this spring or summer once prices consolidate. The same goes for oil services companies or the drillers.

The best supply and demand bets for 2011 in the grains complex lie in corn. The fundamentals for corn remain incredibly bullish and the current pullback should be used as a strong buying opportunity over the next few weeks and months. No other crop looks better on a supply and demand matrix.

But one place investors should make a commitment now are the meats, or live cattle and lean hogs. Ahead of Memorial Day this spring (seasonal demand trends, barbequing) and the growing cost of feeder (corn inputs are rising), meat prices are rising and will continue to climb for the remainder of the year.

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