How to Harvest Corn's Next Big Move

Posted by Wealth Wire - Tuesday, April 24th, 2012

My wife and I work and live on a small farm in rural Maryland.

Nothing huge mind you. It was once part of a much larger soybean operation, but the original owner’s kids weren’t interested and sold out.

The farm offers me three primary advantages:

The main road is a good ways off so I don’t have to worry about my kids or animals getting run over. It’s quiet, and my nearest neighbors are several acres away, which dramatically improves our relationship.

I have two deep wells and a septic tank, so I don’t have to pay the county for water or sewage. (The state charges me a “flush fee” anyway. They swear it goes for Chesapeake Bay restoration, so I suppose I shouldn’t whine about it.)

The day it all hits the fan, I can grow enough food for my family and friends. In the meantime, I mainly grow decent watermelons, tomatoes that actually have flavor, and damned hot peppers.

Real Farmers Are Loving Life Right Now

I would not call myself a farmer, though. My buddy down the road, Frank? Now he’s a real farmer.

Frank mostly grows corn these days, which he sells to an outfit that eventually turns it into ethanol-based fuel. The past couple of years have been very good for Frank.

Rising crude oil prices have made corn-based ethanol very attractive. And federal subsidies and regulations dictating the blending of American ethanol into foreign gasoline certainly hasn’t hurt.

On the cost side of the equation, rock bottom natural gas has made certain fertilizers relatively cheap as well. And with the Fed keeping interest rates near zero, credit (when you can get it) is pretty cheap as well.

This spring, Frank is planting all of his own fields and has borrowed from the bank so he can lease acres from his neighbors as well. He even offered to plant my spread!

These days, my friend’s wife goes into town in a new Cadillac. But Frank still drives a beat-up, 20-year-old pickup truck. “What the hell – it runs, and it’s paid off. Hey, you never know what’s coming next, eh?” he’ll say.

Today Things are Great! Tomorrow? Maybe Not So Much

It may seem strange that a market analyst and a farmer get on so well. But farmers have an awful lot in common with Wall Street traders these days.

Ask a farmer how he’s doing right now and he’ll tell you that things have never been better. But ask him about the future, and he’ll fret and whine as to how it’s probably all going to go to hell tomorrow.

According to the latest DTN/The Progressive Farmer poll, farmers love the current setup. The poll’s “Present Situation Index” came in at 140.2, up 6.2 points from December’s reading of 134.00.

But the respondents’ confidence in their prospects 12 months into the future fell 6.6 points from an index score of 94 last December to a measly 87.4 this spring.

According to Iowa Farm Bureau Federation Chief economist Dave Miller, “2012 is likely to be a year with declining markets for major crops. Seed costs are up, diesel is up, and land rent is up. You’re going to see margins squeezed.”

The Department of Agriculture quantifies these potential troubles neatly: “Farm net income probably will fall 6.5 percent to $91.7 billion this year from a record in 2011 as planting increases and rising expenses trim profits. Spending on fuel will rise 1.3 percent to $17.2 billion, pesticide costs will jump 4.5 percent to $11.3 billion, and electricity will increase 5.4 percent to $4.8 billion.”

Wall Street Mimics Main Street

The situation with U.S. farmers and Wall Street meshes rather neatly. Cheap money from Washington has driven up activity. On Wednesday morning the Commerce Department is expected to report monthly climbs in durable goods for four out the past five months. 

But the falling dollar is also driving up costs. As I write, the U.S. dollar is off its January highs by some 3.66%, crude oil is trading around $107 per barrel, and gas at the pump is scratching $4 a gallon nationwide.

Sooner or later, both Wall Street’s and the farmers’ worries will come true and inflation will crash both parties. Production costs in field and factories will overbalance sales and profits will vanish. Overpriced land and overbought shares won’t be worth squat.

It’s a grim scenario, and to be frank, there is little we can do to avoid it.

So why am I not horribly depressed?

Simple: I own a farm. But I am not a farmer.

How to Spot a Rising Market

These cycles of boom and bust make stink for farmers, but they are tailor made for traders equipped to ride both sides of the slope. We can safely ride the market all the way to the top because Stacked Sell Signals will tell us the exact moment the crash begins.

Heck, our methods can be applied to the farming sector just like we apply them to stocks. Check out the above chart for corn futures. We have all the elements we need to make a strong prediction:

Price has just completed a cyclic down-stroke within the context of a long-term rising trend.

We have Stacked Buy Signals marking a clear turnaround into the next cyclic upstroke.

Price has strong support beneath it and lots of upside room to run before plowing into technical resistance.

Using this setup, I would posit that corn futures could easily hit 717 (+6.7%). It is quite possible that this run could extend to 789 (+17.4%).

How to Play It

Fortunately, you don’t need a futures trading account to play corn’s next move.

Here is the technical chart for the iPath Dow Jones UBS Grains Total Return ETN (JJG – NYSE).

 

This asset trades just like a stock on the New York exchange. Its managers use futures to match up with the price and yield performance (less fees and expenses) of corn, soybeans, and wheat in Chicago.

JGG is giving us the same set of Stacked Buy Signals we saw on the corn futures chart. Using my proprietary algorithms, I can predict that once JGG clears resistance at $48.37, it ought to run to $55.96 over the next eight to twelve weeks, for gains of roughly 20%.

How to Leverage Corn and Ethanol Gains This Spring

Now remember, there is nothing magical about technical analysis. It can’t predict the future anymore than it can provide rain for dry farm fields.

What it does is stack up and analyze the proven actions of a couple million experts as they react to inside information and specific circumstances. In the hands of a proficient operator, that’s still a pretty powerful tool. Leverage that tool with option contracts, and things get real interesting real fast.

*Post courtesy of Adam Lass, Bottarelli Research.

  +8

Add a Comment (Pro Members Only)

E-mail:
Password:
	Don't have an account? Click Here
Subject:
Comments:

More like this...

Goodbye to Farmland, Hello to Cash Crops
The farming culture has turned from family traditions to financial takeovers as farmland value continues to surge.

George Soros and Jim Rogers Selling Gold, Buying Farmland
As food prices are skyrocketing all across the globe, many big time investors are turning away from gold and toward farmland...

Is There A Farming Bubble In Our Future?
Questions are being asked if farmland prices are a bubble or steadily rising.

Jim Rogers: Investing in Agriculture Will Make You Rich
"I fully expect more social unrest in the world, I fully expect more turmoil, but I didn't expect it to happen this quickly." Rising food prices will result in increased rioting.