So as i drink my morning coffee and prepare to fly out with my family to Chicago I am reading through hundreds of reader email and I came across this one. Boy I would be as rich as Bill Gates if i charged a dime for each, “just one more question” lol

No truthfully I love it.

I really enjoy helping subscribers when I can.

So when I get an email like the one I got today I feel compelled to answer it since I love to trade and I love helping people… Read On… Best, Kevin

—–Original Message—–
From: Andee
Sent: Friday, August 01, 2008 4:35 PM
To: RTA Kevin Kerr
Subject: Revised question

I recently signed up with you in May. I’m a beginner. I’m new to commodities. What I do know is buy low/sell high. So far I’m on autopilot and doing well. Because I am doing well, I’m interested in learning and participating more. Even picked up some books on commodies and options trading. But there are somethings I cannot find answers to. Such as…

What is the difference between all these numbers: for example 1250, 1500, 1700, 1800 in commodities?
When I’ve reviewed your online portfolio and alerts, you’ve chosen sugar calls that are between 12 and 18. When I review option quotes, 9 thru 20 are available. If we chose the example of corn, you picked a 520/580 call, in a field that expands from 140 thru 1000. Or in OJ, you pick a 160, in a field of 80 thru 250.

1) What are these numbers?
These are the strike prices. They are a range of prices you can choose from that the underlying commodity futures may or may not trade. Every commodity is different in which “strike prices” they offer and months they trade, pricing can often be different too. The best way is to check the contract specifications for the particular commodity.

2) Are some of these contract numbers more commonly traded than others?
Yes, usually strikes that are closer to where the underlying futures are at trade more, not always though. For exmaple if gold futures are trading at $900 and you look at the $910 calls or $890 puts they will likely have much more activity than the $1500 calls or $600 puts, simply because there is more chance of those prices actually trading. A deep “out of the money” or call would be to buy a $1500 call, it is a long way off, at least for now. Does that make sense? A deep in the money call would be say if you bought the $800 calls, since gold is at $900 those calls already have intrinsic value, that is a deep int he money call where a $1500 call would be deeply out of the money, far away in other words. The more an option (put or call) is in the money the more it is worth, or the more you will pay depending on how you look at it.

3) Would some contract numbers show a more profit margin than others?
Well yes as I describeed above, you are going to have to plunk down a lot more equity for an in the or “at the money” (in other words the strike price is exactly the same as the underlying price at the moment) Now if you bought a deeply out of the money option, say gold calls and tommorrow we wake up and find out gold is at $1300 your $1500 calls would have gained a ton of premium and at the same time you would only have invested a little…SO clearly your profit margin will be huge. Problem is those major moves often do not occur , although lately they have become the norm which is why trading options has been so lucrative.

4) Is this a median between the lowest and the highest? I am not sure I understand the question, the median I guess would be wherever the futures prices are currently trading. If gold is at $900 then an “at the money options would be the 900 strike price for both puts and calls.

If you entered a trade as a spread, do you always have to sell it as the same package or can you just sell the short end of the trade instead of the whole thing? Let’s use the example of the Dec 08 1000/1050 Gold spread. Could I have just sold the short 1050 call and still held onto the long 1000 call? I’ve never seen anything written on it so I’m assuming you can’t, but I don’t know why? Yes actually you can but it gets complicated.

Let me try and simplify it. When you buy a spread all you are doing is basically funding the purchase of an option with the sale of another. In this case you bought the 1000 call and sold the 1050, it limits your initial outlay of premium ($) but it also caps the profit potential to, it tops out at the maximum for the spread, in this case I think $5000 but don’t quote me on that. Now spreads are traded in two ways, “outright” and by “legging”, for the sake of RTA I assume everyone is trading the spreads as outright as legging can get messy.

Outright is done just as it sounds, the spread is traded as it’s own entity both options at the same time. Legging means that you are doing one option at a time. If say you wanted to buy back the 1050 call (not sell it because you are already short the 1050, so you have to buy it back. Once you do that then you would take a profit on the short leg (1050 call) and now just be long the 1000 call for a loss, make sense.

It is a good strategy, especially if you think gold will then rally again at some point, just make sure you know exacgtly what you are doing to cove the legs of the spread and evaluate all costs associated with doing it. But yes to answer your question, yes you can.

I’m sorry for my depth of ignorance and any insight you can toss my way will be greatly appreciated.

Thanks, AnneD

There are no bad questions and if I don’t have the answer I am the first to admit it and I will find you the answer, that’s my job. Most of all don’t get frustrated, this stuff is very easy and I suggest getting a copy of my book as I outline a lot of this in very simple language in my book. Best, Kevin

Well as our Fed leaders gather today and Wednesday we will get the play by play from the media, yawn.

Here’s my prediction: The Fed move is likely to have a strong statement on inflation and the concern for the dollar, but no rate increase. Truly, even if they voted for a “radical” .25 increase to shock the market, what are we really talking about. Nothing! Now, I am no economist, I am a trader. So I am the first to admit that my understanding of what is best for the economy may be a bit skewed.

Let’s face it, the job market is softening, business is scared of who will man the White House come next year and consumer confidence is on a cliff. Meanwhile, inflation is soaring, more mortgage resets are coming down the pike and heating oil prices this Winter are going to be obscene. Oh yeah, flooding in the Midwest will cause almost all categories of food to soar, corn is only the tip of the iceberg. Everything from cherries and dairy in Wisconsin to Cattle and soybeans in other Midwest states.

The meat market will also be decimated as feed costs become out of reach for most feedlots. Enjoy that $50 steak at Ruth Chris, it will cost you $100 next year.

I have followed the meat markets for many years and in all that time I have never experienced a better time to buy futures, cautiously. I wrote an article a few years back that seems like i could have written it yesterday. Here is an excerpt and you can click on the link if you want to view the entire story.

(Excerpt Below)

Few markets conjure up as many images from investors as the meat futures markets do. Some people will think of Old West cattle auctions, with cowboys and ranchers bidding on prized bulls. Others know the meat markets are just like any other market, though they still hold on to the notion that it’s exotic and full of risk.

And that’s just bull. (Sorry, couldn’t resist.)

Certainly meats are risky, the same as any market. But they’re also a vital market filled with many opportunities for your portfolio. Of course, you’re not likely to hear about them from your broker. The sad fact is, most analysts on Wall Street only know cattle as it’s served up to them at a Morton’s or Ruth’s Chris Steak House.

Essentially, meats are traded on Chicago Mercantile Exchange. And as I said, all trading is done much the same as any other commodity.

Of course, like all markets, meats have a very unique language. Traders concentrate on data that nobody else looks at.

Full Story Here>>

http://www.silverbearcafe.com/private/meatmarket.html

—————————————————

So all we can do is wait and see how the markets react. Gold is firmer today as the dollar declines and the Euro finds some footing. Gold was only down about $15 yesterday, which these days is a normal range. Hell, when i started in the business in 1989 a $20 move in gold and $5-10 move in oil would have been unheard of. Crude is surging up $1.60 as I write this morning and it is likely on its way to $150 at this rate.

Let’s see dollar lower, oil higher….hmmmm Makes sense to me. Just like i said on CNBC yesterday , see video in yesterdays post below.

One last note, I bought a $100 crude put yesterday for around $500, I figured it is a good hedge and it gives me until September. By the way, I am still long cocoa and sugar, cocoa may be time to grab profits though, no reason to be greedy.

Next week is my birthday (41, ugh) so it will be an early B-day present. The it’s off to Vegas for FreedomFest 2008!

http://www.freedomfest.com/

—————Viva Las Vegas!

Hey, if you are anywhere near Vegas you must come by the conference or heck swing by the Bellagio and maybe we will meet in the lobby, who knows. Or if you can’t make the conference I am trying to set up a book signing off site of the conference too and will keep you posted.

Ok, check back later today as I am doing a mega RTA Mailbag right here on the blog, I have gotten tons of email so we can only answer a few in any issue and the rest I will do here, be sure to check back today and tomorrow!

Ok so here we are at the official start of summer in the US,hope you’re enjoying your holiday weekend. I for one plan to grill and catch up on a couple of books.

I am currently reading “The Importance of Living” which was suggested to me by Dr. Mark Skousen who is on Kudlow & Co. with me once in awhile and he also invited me to speak at his conference in Las Vegas this July “Freedom Fest”.

Ok so all this weekend keep checking back to the blog as I will be answering many questions from my RTA and OI subscribers. I get hundreds of great email questions a week and we often can’t answer even 1/10th of those.

SO look for more answers to more questions here each week from now on. Also, I always post some of my recent appearances on TV so scroll down to the last few days and you can see me on CNN, BNN, Fox and my interview with the Wall Street Journal. Enjoy!

By the way, have you picked up your FREE copy of my 2008 Agriculture Trading report? You can get your copy on the front page of our website. Enjoy

Now let’s get to some of those questions. I am in my hammock with a cool drink watching my 16 month old daughter run around the yard.

I do some of my best trading and thinking right here in the summer.

So let’s jump in to my readers questions.

Reader Mail from around the World….

Q.

Hi Kevin,
Thank you for your answer to my question earlier this week.
I sold the spread for 39 cents (I only had one contract) but now I’m cashed up and ready to have my money work some more. That is one thing that I’ve not seen money management folk address … one of the advantages of options, like you’ve said, is knowing exactly, up front, what your losses could be, and therefore … (sez me) there is no reason not to be 100% invested and have ALL your money working for you (as long as you don’t put it all on one play … red 17!?!)
BTW you have more than doubled my account, and we’re not through the year yet! Granted, the pockets were not that deep before (oh and they also had dust and spiders due to lack of activity). But the pockets are deeper now !! (and clean)
Thank you,
Lu

A.

Well most of all I am glad to hear you are doing well and keep your head down and 2008 could really be great for you. I like starting new traders with options just for that reason, limited risk and a little bit slower movement then futures. One step at a time, slow and steady wins the race. Best, Kevin
——————–

Q.

In six months I have increased my trading account by about 50%. Thanks for all your guidance and discipline in trading…Mike

A.

Congratulations! Expect some losses this year too though, hopefully more wins than losses but always protect equity. Take some of those profits and set them aside, always use risk management, that’s smart trading. Good Luck, KK

——————–

Q.

Hi Kevin,

I am new member of RTA . I have not placed any trades till date.(account just got ready)
Please advice if there are some good entries that I can make now ( from the previous Alerts that you have given , and still valid) , so that I can call up my broker and say ” Please place this order “

Thanking you,
Sam

A.

Well I still like all of our trades except maybe sugar. I think OJ is a sleeper, even thoguh the options are way down and the market has been very weak. The only thing that worries me is the shrinking volume of the exchange, mainly due to ICE taking over and basically destroying the exchange. Very unfortunate. We will have many more new trades soon too. Good luck. Kevin

——————–

Q.

Hi Kevin.

I appreciate your explanation of a bull spread in your mailbag but I still have a question… I understand the premium received when you sell the higher priced call is supposed to help reduce the cost of the lower priced call. However, doesn’t the value of the higher call go up alongside the lower call? If so, doesn’t its premium rise as well? What confuses me is that if, when you buy it back, the premium is higher than it was when you sold it, how is this really reducing cost? Or are you supposed to let the higher call expire worthless? I am still confused about the exit side of these spreads. Thanks and take care! CZ

A.

Spreads do have maximum profit due to that, that’s why many people don’t like them, they also have twice the brokerage, so brokers love them. Typically the lower strike will appreciate much faster and the maximum for the buyer comes at expiration, rarely would we hold a spread that long, we would instead take profits much earlier. Take care, KK

———————

Q.

Only had 1 contract so decided to take it. Got filled at 35.75 for 81% Figured 81% is a good profit for a few months. Can’t go wrong there!

Bob

A.

81% in a few months, let me check….Yes, yes that is a good profit….lol Tell me where else you can make 81% in a few months, congrats! KK

——————–

Q.

Hi Kevin,

Your advice is excellent and your service is great, thank you.

However, I guess I must be rather thick headed. I will not trade spreads in future because they are too difficult for me to enter electronically and TradeStation representatives don’t seem to understand what you are asking them to do when I read them your instructions.

Kind Regards,

Jim

A.

TradeStation is good but I highly suggest getting a broker you can talk to on the phone in order to place these trades. Look, you can trade both online (to save money and for ease) but also have a real live person to talk to. Very important. Good Luck and thanks for writing. Kevin
——————-

Q.

Filled the corn spread at 35.6 points. Filled the soybean spread at 39 points. Thanks for two great trades.
Ron

A.

You’re welcome and enjoy the profits, hopefully we will take even more on the second half of those trades, always good to lock in profits though. KK

——————-

Q.

Wondering if you can explain why sugar might follow oil down (if it ever corrects) when it hasn’t followed it up. Also, if the trade looks like it might not have enough time, is it not better for new subscribers to pass on adding to this position, or perhaps purchase an option farther out?
thanks

A.

Well 5 years ago if you had told me sugar would be tracking crude at all I would have been amazed. Truth be told is that we need to see a lifting of the tax on imported sugar based ethanol, that will be the catalyst, all the best, Kevin

——————

Q.

Good Morning Kevin.
Regarding the Soybean oil 65/70 dec call spread. I got in at 150.

Please explain something for me because you have me confused. Your alert for the 65/70 spread (BOZ8) referred to it as the Dec08 calls. Your briefing note on May 19th says that its the Nov 65/70 spread. When you send out the alert to sell I’ll be looking for the Dec spread not the Nov spread . Did I pick up the wrong spread .

Sincerely

Pell

A.

That was a typo and a mistake on my part, I apologize. It’s a good lesson though. Mistakes are easy to make especially when trading similar contracts. In this case though soybeans trade November and soybean oil trades December, not vice-versa. KK

Q.

Kevin;

Brief note on planting. I live 30 miles outside of Indianapolis in Anderson. My wife and I were out in the farmland twice this past weekend in different areas. It appeared to me that about 20% of the fields were still not planted and we are at the end of May. I been in the real estate busines for 42 years and I am very familiar with farm ground. Thought this might be interest.

Kendall

A.

Thanks for the update, keep em coming all season if you can. Best, Kevin

——————-

Q.

Dear Kevin,
I am new to RTA. Where can I get quotes so that I can follow prices
for commodities and options?
Regards,
Sheldon

A.

I use e-signal but many of the exchanges now offer quotes too. Depending on who your brokerage account is with they may offere them to you for free or for a discount, I would ask. It really depends if you want LIVE quotes or slightly delayed. For RTA purposes it’s not as important ot have 100% live quotes since we are trading options not futures. It will save you a lot of money or even be free if they are delayed. I would first check with your broker or one of thebrokers on our suggested list, you can find them at the link at the bottom of yesterdays update. Good Luck

——————

Q.

Kevin,

Can you possibly explain this when you get a chance? What does order busted mean? Are the floor traders playing games?

Thanks,

Jerry

A.

Well I’m not sure, you would have ask them. Busted can refer to a lot of things but it usually means there was something wrong with the order itself, (ie. Bad Price, month, etc.)
I would have them explain to you exactly what happened with this particular trade, if they can’t or won’t then find another broker immediately. best, Kevin

—————–

And our last one for today, but be sure to check back all through the weekend for more email and my outlook for the coming trading week.

Q.

Kevin,

Sorry to bother again! But wondering if you can comment on the following in your next mailbag. It is from a newsletter I subscribe to, written by a very respected market analyst (Bert Dohmen, The Wellington Letter):

“When central banks try to prevent recessions, it leads to higher and higher prices … Speculation in order to ‘beat inflation’ heats up. We are seeing this now, with hundreds of billions of dollars flowing into commodity investments …

All this money going into the commodity funds produces an artificial price boost for these. We are seeing inflation through speculation. When the bubble bursts, it will go down fast and furiously ….”

(I think he’s referring mainly to oil, coal and grains, since the same author is extremely bullish over the next 2-3 years on gold)

thanks, Mark

A,

Yes, funny enough I was just on TV with Burt the other day on Fox Biz with Stuart Varney…I will post a link here in a bit for that interview. The question isn’t whether many commodities will eventually correct, it’s when. Having said that, to jump on the short side of these markets right now expecting some huge plunge, well I wouldn’t suggest it. Look for the video here later.

Ok well that’s all the time I haver today, my lemonade is gone. Be sure to check back over the weekend for more answers to more questions. Enjoy the holiday.

A Brave New World

As you approach Dubai by freeway you traverse vast desert and scorching hot sun. Many Mosques line the sides of the road, as well as numerous housing projects that seem to go on forever.

Then suddenly in what seems to be a haze or fog a shadow, a tall shadow appears. It’s the burj Dubai.

When completed it will be the tallest building in the world, by far. The question is for how long, other big projects are planned. Yikes, are there any cranes left, any steel, any cement, any brains?

In the meantime, that’s a lot of office space to rent out. But then again Dubai plans to have an astonishing 180,000 hotel rooms by 2015. 141,000 just in the next seven years. Currently there are a mere 60,000 hotel rooms available.That is the blaring headline on the front page of the Gulf News Daily Business section.

Anyway, the burj is huge, but Just how tall the tower will be remains to be seen.

As with any skyscraper, there is a certain amount of “fudge room” where the actual height of the construction may not be exactly what was anticipated. With a project as massive as this, more flexibility is called for in the design, planning, and execution. At this time, the tower is expected to be 2,683 feet tall (818 meters).

However, those numbers have changed in the past and are likely to change again. There are estimates that it could go as high as 3,116 feet (950 meters) when all is said and done. It is also unclear how many stories will be in this tower. Early estimates were around 200, but those have been lowered to 189 as construction progresses.

Anyway as we continued on to my hotel, the Fairmont Dubai, I noticed the new monorail/train Dubai is building. In fact the elevated train runs along the freeway almost the whole way as you enter Dubai. I could see the workers on top of the pylons and trestles, seemingly without any harnesses or safety equipment several stories in the air.

Surely, if the fall doesn’t kill you the cars going 85 mph below most certainly will. Suddenly my job doesn’t seem so bad. Throw in the 120 degree heat and 15 hour day and well I think you have the job from hell.

Aussie Joel, my mate from Agora and his girlfriend were telling me at dinner the other night, that these guys, mostly Indian and Malay’s, work in these conditions in July when the heat is even more intense. Worse still, during Ramadan they cannot even drink water due to the fasting requirement.

That means from Sept 1st-September 30th certain things are off limits, refer to chart above.
Now I am not criticizing or judging anyones religion, not at all. I just am saying I can’t imagine working in those conditions, especially in that heat, and no water. Joel said that at least one a week keels over or slips and falls into traffic, it’s just part of it. Nice!

Anyway, nobody fell on my car so we drove onto the Fairmont and pulled up to the front of the hotel. Below you can see the Fairmont in the lower right corner.

Now want to get a real sense of the growth rate here in Dubailand. Here is the same stretch of road only a few years ago. It’s simply incredible.

Now I’m sure like me you may have seen these before and after pictures somewhere else, but let me tell you until you see it up close it’s really hard to grasp.

Anyway, I checked in to the Fairmont, always a fantastic hotel. In fact that is the hotel chain the Agora Investment Symposium is held each July in Vancouver. I hope you can come join us this year. I will put a link on here soon.

Anyway. I settled into my room and figured out all the things I wanted to see. First I rang Joel and we planned for dinner out by the Palm Islands, but first I had to run to CNBC Arabia to do an interview.

Again, it beats working on a three story pylon above a freeway, it’s still work. More from Dubai in my third installment tonight right here.

Also I will post my appearance on CNBC Friday on Kudlow & Co. I was noticeably jet lagged but still able to get in a few punches…lol Check back this afternoon.

By the way happy Mothers Day. Alexandra and I took Mom to the Brooklyn Botanical Garden, she loves to take photos so we knew she would like it. We both love her very much, because of course she is the best mom in the world.

Enjoy the day with your MOM!

Welcome to the City of Gold

I am fortunate, very fortunate to be able to travel the globe and almost everywhere I go I know someone or someone knows me from my newsletters. It’s an amazing thing to be able to learn about a new culture and to experience our changing world first hand.

My Journey to Dubai began in Abu Dhabi last week. I was asked to speak at a conference of Sovereign Wealth Funds regarding commodities prices , mainly energy. I then had a few private meetings with some of them. While I cannot discuss the conversations I will say I was impressed.

Needless to say the 15 hour flight from New York got me into Abu Dhabi in the early morning around 7am.

As I cleared customs and headed outside my driver greeted me and as the doors to the outside opened it felt like when you open the oven door and are checking on your food. A sudden a searing heat hit me. I am not a big fan of heat, I mean you will never see me living in Arizona.

Anyway, as my driver escorted me to the waiting BMW I was happy to sit down and crank the A/C. Well what did you expect Kevin? It’s a desert.

So my time in Abu Dhabi was very interesting and the conference was very well done. I wandered around Abu Dhabi at night and during the day when I had time, you can tell it is growing and changing, yet is far behind it’s neighbor Dubai. Still you can see the Western influence creeping in, form Pizza Hut to Gloria Jeans Coffee. Still the fact that this is a Muslim country is clear, as evidenced by the Mosque underneath my hotel room at the Millenium Hotel which broadcast a call to prayer 5 times a day (even at 3:30am I think)

If you would like to experience this amazing Adhan call to prayer, click below…(Just not at 3:30am)

http://www.youtube.com/watch?v=UlLaUCAQlQQ

Anyway as the conference wrapped up my good friend and fellow editor Joel “Aussie” Bowman showed up and watched me speak, we agreed to meet in Dubai the next day.

So I was off the the City of Gold and to see what all the fuss is about, and if it was really “all that”

We’re Not in Kansas Anymore To To

As I left the Millenium my driver took my bags and said it will be about 1 hour and a half to Dubai. As we drove along I saw an amazing Mosque and then not much, then suddenly a long strip of houses, like town houses being developed, but none finished…it seemed to go on for miles and miles and miles.

As we drove past these developments I couldn’t help but think as I sipped on my bottle of water, where will all these homes get water, electricity and Air Conditioning from?

So we drove on and on and as I started to listen to my i-pod in the distance I could see what appeared to be fog, and then ever so faintly I saw a thin grey/black line in the fog, reaching into the sky… Couldn’t make it out. After all on either side of me and in back of me was all sand and barren desert as far as the eye could see. Suddenly it was like the scene in the Wizard of Oz where Dorothy wakes up in Oz after the tornado. Black and white went to color and suddenly I realized I was in another world completely.

More on all that I saw and did in Dubai in Part II and III over the weekend, please check back Sunday for part II.

I am off to the Brooklyn Botanical Garden with my family to celebrate Mother’s day, we wish you all a happy Mother’s Day indeed.

 I will tell you this.  My phone has been ringing off the hook from every media outlet on the planet, at least that ’s how it seems.  Everyone except CNBC Squawk Box where I seem to be way down the totem pole lately.  That’s fine, their loss. In spite of the fact that  I broke this story with them 3 years ago, now Gartman and others who never talked ag’s before are the guest hosting Squawk Box, typical.    A day late and a dollar short as usual.  I briefly turned up the volume and heard them discussing who was wearing what and whose hair looked good and I had to do a double take if I was watching a business channel or Entertainment Tonight…All I can say is Ugh.

Anyway, I am off to farm country Thursday and excited to see things first hand again this year.  Tonight before I go though I am going to swing down to NY and visit my friend Neil Cavuto to discuss food prices and where we go from here.   Meanwhile my business partner and friend Sean has some spot on analysis of the grain markets and I share it with you now.  From his Money and Markets report.  Enjoy. 

From Money and Markets 

 

“The United Nations’ Food and Agriculture Organization (FAO) said that world cereal production may jump a record 2.6% this year as farmers boost plantings.

In other words, supply is fine.

Except … wait a minute … what’s that other report I read last month? The one that said world cerealdemand is growing at 3% a year.

Today, I’ll explain why this seemingly insignificant gap between supply and demand scares the bejeezus out of me, and how you can protect yourself.

The gap is only four-tenths of a percent. What could possibly go wrong, you ask?

Well, for starters …

The World’s Food Supplies Have Collapsed …

Worldwide stockpiles of cereals (wheat, corn, etc.) are expected to fall to a 25-year-low of 405 million tonnes in 2008. That’s down 21 million tonnes, or 5%, from their already reduced level last year.

U.S. wheat stockpiles are at a 62-year low, even though farmers are planting from fence-to-fence. And with the U.S. dollar falling fast, foreign buyers are lining up to scoop up as much of Uncle Sam’s grain as they can carry away. Wheat recently soared to the highest price in 28 years.

Meanwhile rice, a staple food for three billion people, is becoming increasingly scarce. World stores of rice have shrunk from 130 million tons eight years ago to today’s stockpile of 72 million tons — enough for only 17% of annual global demand. Result — the price of rice is up 70% in the past year.

And as for corn — well, more and more of that is used for ethanol. The price of corn is up over 70% in the past year and has more than doubled in the past two years.

So to summarize — stockpiles are at record lows. The supply on hand can be measured in days! And growth in production can’t keep up with growth demand.

Now, let me ask you this question …

What If Something Goes Wrong?

What if the increasingly freaky weather the world has been enduring causes droughts on one side of the world and floods on the other? What if there’s blight or some other major crop failure?

You can see why I believe we are one bad harvest away from a serious global food crisis!

People will put up with a lot, but they won’t put up with going hungry … not when they have guns. In fact, blood isalready being spilled over food …

 Egypt — food riots! In the time of Julius Caesar and Cleopatra, Egypt was the bread basket of the Mediterranean. Boy, how times have changed. Food inflation is so bad in Egypt that people are rioting over sky-high prices. The government-owned Egyptian Gazettenewspaper says that seven people have died since the beginning of the year in brawls in bread lines.

And it’s not just Egypt. The World Bank says 33 countries from Mexico toYemen have already experienced unrest because of spiraling food costs, and 37 countries may face more social upheavals if food prices continue to rise.

 China says “no” to hungry Filipinos. The Philippine government recently asked China to provide 200,000 metric tons of milling wheat, equivalent to about 10% of annual consumption. Beijing declined, leaving the Philippines scrambling to find more wheat. Trouble in Uncle Sam’s breadbasket. Cold weather is chilling the fields in the Midwest, and too much rain is sending rivers near their flood levels. Farmers who try to till or plant in soils that are too wet will risk compacting their crops and other problems that result in lower yields. On my blog last week, I published a note from a farmer who complained that he STILL can’t get a crop in the ground:

“In 2006, we finished planting my crops on April 23. In 2007, we were done on April 18. I don’t want to be the first guy planting, but I don’t like being third, either. Early (timely) planting won’t happen this year if the weather forecast for the coming weekend proves accurate. Soils are completely saturated to the point of that erosion has already occurred and will get worse with additional heavy rains, and are COLD. I can’t tell you how cold because I’ve not even checked temps yet. If planting is not done by May 1, there will be some nervous farmers in LaSalle County and I’ll be one of them.”

Now sure, that’s a local story, but it’s not the only one. In fact, just this week, the USDA reported that corn and rice plantings are being delayed by excessive rain. A hungry world is depending on a good U.S. crop — if we don’t get one, those 37 countries the World Bank is talking about could erupt in food riots.

How We Got Here …

Global food prices surged 57% last month from a year earlier, according to the FAO. There are a number of forces driving that price explosion …

Weather: Part of it is weather. Too much rain in the U.S. in 2007, flooding in Indonesia and Bangladesh and drought in Canada andAustralia curbed world stockpiles. As a result, the poorest countries may spend 56% more on grains this year than a year ago. Global warming will affect crop yields, and mostly not in a good way.

Food or fuel? Ethanol production is on course to account for some 30% of the U.S. corn crop by 2010. The International Monetary Fund estimates that corn ethanol production in the U.S. fueled at least half the rise in world corn demand in each of the past three years. As corn prices go up, animal feed goes up, and prices of other crops rise as farmers switch their fields over to government-supported corn.

As the economic boom in China raises the standard of living, 1.3 billion people have drastically increased their consumption of meat.

Rising Demand: World Bank President Robert Zoellick recently told a conference: “As the Indian commerce minister said to me, going from one meal a day to two meals a day for 300 million people increases demand a lot.”

And he’s only talking about the poorest of the poor. There are 1.1 billion people in India, and they’re all improving their diets and eating more Western foods. Meanwhile, 1.3 billion people in China are eating a lot better and eating a lot more meat — and it takes 7 pounds of grain to make one pound of meat! It’s no wonder why food prices in China jumped 28% in February.

Political pressures: China isn’t the only large, populous country that is curbing exports to ease prices — and internal unrest — at home.

• Vietnam, one of the world’s three biggest rice exporters, will reduce shipments by a million tons this year to 3.5 million tons to ensure supplies domestically and curb its highest inflation in more than a decade (20% year over year — ouch!). The government also said it’s considering a tax on rice exports. Egypt, Cambodia and Guyanahave all also put export bans on rice in place.
• Kazakhstan just suspended its wheat exports to tame domestic inflation. Kazakhstan is the breadbasket of Central Asia, and the only state in the region that exports grain, about 50% of the 21 million tons it says it harvested last year.Ukraine stopped wheat exports this month and reduced barley exports.

• Argentina — the world’s fourth largest wheat exporter — has effectively pushed back the date that new shipments can leave the country.
• India has already put restrictions on its rice imports. And its wheat output, second only to that of China, may drop 1 million tons to 74.81 million tons in the March-April harvest because of a drop in acreage.

Coming Next — Hoarding!

What’s more, India may import up to two million tons to build stockpiles — up from imports of 1.8 million tons in 2007 — with an eye on creating a strategic reserve of five million tons of wheat and rice to meet emergencies. Pakistan is also talking about doubling its wheat imports this year.

If other countries start building strategic reserves, it could send prices skyrocketing. And that raises the specter of countries fighting each other over food reserves.

Speaking of reserves, since China reportedly has as much as 200 million tons of grain reserves, you have to wonder why they turned down thePhilippines‘ request for wheat exports … unless, maybe, they don’t have as much as they say they have.

Why would they lie? How about a powder keg with 1.3 billion hungry people sitting on it!

Or maybe the Chinese can see the way that forces in the agriculture market are falling into place and they believe that no stockpile can be big enough!

How You Can Protect Your Portfolio …

No one wants to get rich off hunger. But you do want to protect your portfolio from market turmoil, and the profits on agriculture could cushion the blow for other sectors you own that might be getting hurt.

One way to do it is with the PowerShares DB Agriculture ETF (DBA). It tracks an index composed of futures contracts on corn, wheat, soybeans and sugar. It’s up 17% year-to-date — pretty good compared to the 9.5% loss for the S&P 500.”

 

CNBC Asia is awesome. Smart, in depth, easy on the eyes… Great discussion on the grain markets.

Grain Drain The reduced global wheat harvest has caused prices to double. Kevin Kerr, president of Kerr Trading Int’l & editor of Resource Trader Alert reviews the dangers facing wheat supplies, with CNBC’s Amanda Drury & Sri Jegarajah.http://www.cnbc.com/id/15840232?video=705301085

Those of you who have been with me a couple of years know I usually try to get out to see some farmers this time of year, and 2008 is no exception. The unusually wet planting conditions have pushed back planting, and an exact date to get all those crops in the ground still seems unclear.

You see, the wet, muddy conditions and continued rain make it next to impossible to get equipment in the fields. Also, farmers run the risk of putting seeds in too early and, basically, losing the crop. The situation is pretty grave this year, as demand for all the grains is very high, as are the costs to plant them. The hope seems to be that we will have another year like last year and Mother Nature will be kind. It may not end up that way.

Real crop conditions, farmers’ and ranchers’ sentiments and concerns and good old home cooking are not things you can get sitting at a desk in New York or Washington, D.C. Nope, you have to go to the fields and see for yourself.

When you’re standing out in a cold, wet, muddy cornfield with no corn in it, but plenty of standing water, you get a sense of what we may be facing. In an effort to bring you the best firsthand information for your trading decisions, I travel far and wide to meet directly with everyone from farmers and ranchers in the Midwest to fund traders in