On Friday, Sept. 28, we saw a big jump in corn and wheat prices, with both agricultural commodities spiking more than 5% higher in the session. The rally was due to a quarterly grain stocks report issued by the U.S. Department of Agriculture that showed the stocks for corn and wheat are much lower than most on Wall Street were expecting.
The report revealed that stocks from the so-called "old-crop corn" (corn that was grown this summer) were down 17% from the prior year. The decline was even bigger in soybeans, as the report showed old-crop soybeans stocks have declined some 21% from a year ago. Wheat stocks also were lower, falling 9% during the past year.
So, what are the ramifications of these lower crop stocks? Well, the short answer is higher agricultural prices for these commodities. The longer answer is higher prices for all commodities in the agriculture space such as cattle and hogs that are contingent upon the price of feed stocks. What this means to investors is opportunity, as those higher prices will likely be bullish for cattle and hog futures, as well as for companies in the seed and fertilizer business.
Hog farmers in the United States are slaughtering animals at the fastest pace since 2009 (73.3 million in eight months through August) due to big increases in feed costs, according to a recent story in Bloomberg news. If you want to profit directly from the cattle and hog market, a great way to do so is via the iPath Dow Jones-UBS Livestock Total Return Sub-Index (NYSE: COW). This is an exchange-traded note (ETN) that holds about 66% in live cattle futures and about 33% in lean hog futures. I like COW as an alternative to having a futures account and trying to buy individual contracts on each of these commodities.
This is bullish for COW, because it means smaller herds are likely next year, which should lead to a rebound in pork prices. In fact, the USDA estimates pork supply will drop to the lowest per-capita since 1975 next year, so hog futures are likely to surge.
We have seen a sharp decline in COW since August, and that's despite the worst U.S. drought in more than five decades. Technically speaking, COW trades well below its short-term, 50-day moving average, as well as its long-term, 200-day moving average. The fund is now trading near its 52-week low; however, if we see continued higher grain prices, then traders are likely to bid up COW. Getting long here while the price remains low could pay off big time.
The other agriculture ETF I like here does not hold futures contracts. Rather, it is comprised of some of the biggest and best companies in the agriculture, fertilizer and equipment space.
I am referring to the Market Vectors Agribusiness ETF (NYSE: MOO). With MOO, you get exposure to big-ag companies such as seed giant Monsanto (NYSE: MON), and fertilizer firms Potash (NYSE: POT) and Mosaic (NYSE: MOS). To a lesser extent, you get equipment companies such as Deere & Co (NYSE: DE) and Caterpillar (NYSE: CAT), although MOO is more weighted toward the "ferts," as they are called, than the ag-equipment makers.
Technically speaking, MOO witnessed a big bullish spike higher in September right after the fund broke above its 50-day and 200-day moving averages. MOO currently trades just below its 52-week high of $53.89, which was made in April, but I think that's a marker that can be easily surpassed given the metrics in the grain space. In fact, I suspect that traders could push MOO shares higher by at least 10% from current levels before the year is out.
The bottom line here is that you want to be long the beneficiaries of higher grain prices. That means being long livestock futures like the mix found in COW, and it also means being long companies that supply products that help farmers make the most out of tough growing conditions, and that means the companies found in MOO.
Action to Take --> Buy MOO at the market price. Set stop-loss at $48.28. Set initial price target at $57.73 for a potential 10% gain by Dec. 31.
This story originally appeared on TradingAuthority.com: