AGG Commodities – How to Play

August 12, 2009 10:01 am

We are using the Powershares Agriculture ETF (DBA) to play the growing explosion of prices on many food commodities . Recently, sugar moved higher on the prospect that India will have a tough time with their crops this year after record droughts. That is one component of the 4 in this ETF. Brazil is also having trouble with too much rainfall that is creating problems for sugar crops as well. Otherwise, we beleive that there will continue to be strong demand for food as the populations in the emerging markets continue to grow.

Aug. 10 (Bloomberg) — Damaged crops from India to Brazil mean the world won’t have enough sugar for a second straight year.

Global demand will exceed output by as much as 5 million metric tons in the year through September 2010, leading to a record two-year shortfall, according to the International Sugar Organization in London. Parts of Brazil, the largest grower, are drenched by rainfall four times more than normal and too wet to harvest. India, the biggest consumer, had its driest June in 83 years and may double imports.

The number of options to buy sugar for delivery in March at 30 cents a pound, 44 percent higher than the Aug. 7 price in New York, has jumped more than 18-fold in four months. The rally is boosting expenses for food makers from Kellogg Co. to Kraft Foods Inc. and increasing profits for Cosan SA Industria e Comercio, the largest cane processor.

“I haven’t seen sugar fundamentals being so severely unbalanced in my time,” said Adam Leetham, the Gurgaon, India- based director of Czarnikow Group who has been tracking the domestic industry since 1994. “It’s not just India. You see fundamental deficits in a number of large markets. It certainly looks like we will enter uncharted territory.”

Hedge funds and other large speculators more than doubled net-long positions, or bets prices will rise, to 206,330 contracts this year, the most since a record 240,792 in January 2008, U.S. Commodity Futures Trading Commission data show.

Below is a chart that shows the massive move of sugar over the last few months. At this time prices are approaching a 25 year high.

sugar

The four food commodities that are part of DBA are Sugar, Wheat, Soybeans and Corn. Aside from corn, each have ticked up higher over the last few weeks.

commodities4

Performance of DBA. Stochastics are turning up as the price seems to be holding up well, even in the face of a global deflationary environment. Even as the dollar strengthens over the past week or so, DBA has been relatively strong as sugar has been giving it a boost.

dba

Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.

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