Heat waves are common in the fertile wheat belt stretching from Siberia to the Black Sea. As such the wheat market pays attention to the droughts in Russian wheat belt. Droughts develop slowly, and in general, markets tend to discount them rationally. News last week of a heat wave in Russia was unique in the sense that the prices acted as though the news was a surprise.
Wheat prices in Europe have been rising for six weeks, but in Chicago they caught fire only last week hitting a high of $8.41 a bushel — a 25% rise in a week. Prices of other grains from barley to soybean also jumped on the theory that other grains will be used as alternative livestock feed.
In our opinion, the best way to make money is in the equities affected by the situation.
On the positive side are grain merchants such as Archer Daniels Midland Company () and Bunge Ltd. (), seed companies such as Monsanto Co. () and Syngenta AG (), and fertilizer companies such as CF Industries Holdings, Inc. () and Agrium Inc. (). Wheat requires more nitrogen than some other grains. Therefore, in theory concentration should be on nitrogen fertilizer companies, but for short term trading, potash companies such as Potash Corp. of Saskatchewan, Inc. () may produce higher returns.
On the negative side are bear makers such as Anheuser-Busch InBev () and Molson Coors Brewing Company (), bakers such as Flowers Foods, Inc. (), companies needing animal feed such as Tyson Foods Inc. () and Pilgrim’s Pride Corp (), and cereal makers such as Kellogg Company () and General Mills Inc. (). Consider hedging these shorts with long iPath Dow Jones-UBS Grains Subindex Total Return ETN ()
The following chart is a projection of the price behavior of the long trades. The price projection for the short trades is a mirror opposite.
Conservative accounts may simply want to accumulate a basket of longs on dips and shorts on moves up.
Aggressive accounts can add to the returns by swing trading in the short term according to the projected pattern. Ultra aggressive accounts may use the quantitative and technical screens of the ZYX Change Method to identify entry and exit points in individual positions to further magnify returns.
We will also take a separate long position on iPath Dow Jones-UBS Grains Subindex Total Return ETN around $41.
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