Coming Peak Food

It seems everywhere I go, people want to learn more about commodities trading, the resource markets and where I think we have been and where these markets will go next. Whether my travels take me to the Middle East or the Midwest of the U.S., the stories are very similar. Most people are concerned about the rising costs of commodities. Investors and fund managers are always asking me if this is a commodities bubble and when it will burst.

In fact, now you have all of these dollar bulls coming out and saying that inflation and the commodities markets are simply speculator driven and the worst for the dollar is over. I disagree. Do you remember as a child wishing for something, wishing so hard, yet it didn’t come true? Wishing for something to happen does not mean it will be so. (I never did get that red bike.)

As I shared with my Outstanding Investments readers, and as my Resource Trader Alert readers know, I sold our silver positions for some solid profits a few months ago, and then sold half of our gold, too. And just the day before the gold sold off, it looked brilliant. But I have to claim a little luck on that one. Any good trader knows to give credit to Lady Luck once in a while. Anyway, it was the right thing to do, and now that gold is correcting, my new target is around $850. And here we are: I think now it’s more like $820, but I am seriously looking at adding more longer-term options down here in both gold and silver.

I believe this move in the dollar will continue a bit, although short-lived, and the same problems that drove the dollar into the basement will persist, and even worsen. The Fed can’t just snap its fingers and wipe away twin deficits with some stimulus checks. Too many folks are subscribing to the idea that the consumer will somehow come to the rescue and spend our way out of recession. It’s pure fantasy.

Do I think commodities are in a bubble? No. Do I think that there is a lot of froth in the market? Absolutely. The fact of the matter is that we are in a new paradigm for commodities and the old-school thinking about how commodities used to be traded has to be changed. And this is true of most commodities — none more so than the agricultural ones.

Peak Food: You Heard It Here First

As I sit here in the transit lounge for business class, I am watching CNN out of the corner of my eye, and on the air is Jonathan Stevens, a baker from a Massachusetts company called Hungry Ghost Bread. He is starting to grow his own wheat and encouraging his customers to do the same. Not a bad idea. For a 50-pound bag of organic flour, he used to pay $25, but now pays around $60. So in back of the store, the bakers are now growing their own wheat. Funny, but they may have the last laugh.

Now, while farming in your backyard may not seem very practical, it’s great marketing, and also a new reality. Costco limiting the number of bags of rice — and now other things — that you can buy is clearly physical demand. I am a speculator and a Costco member, but have not been there to buy rice lately, especially 20-pound bags.

Sure, speculation is a part of this puzzle, but to lay the blame on the farmer’s doorstep or to say it’s all speculators and hedge funds causing the run-up is a sad mistake. Real physical demand and a weak dollar are two of the biggest reasons. I don’t see demand going anywhere but higher, and this year is getting off to a bad start for agriculture in the U.S., as the weather has been awful. This year’s corn crop could be extremely disappointing. We are betting on much higher prices in soybeans and corn over in Resource Trader Alert and are using option spreads to take advantage of this. I just got back from meeting with farmers in Minnesota and learned some very interesting things and ways to invest for the next big move.

You can also follow along with my latest TV appearances and my travels to Abu Dhabi and Dubai this week. I will be meeting up with “Aussie Joel” Bowman from The Rude Awakening, who now lives in Dubai, so we are sure to see many interesting things and, hopefully, learn more about some outstanding investment opportunities.

I have to say it is very satisfying to have been one of the only people at last year’s Agora Financial Investment Symposium to speak on the topic of Peak Food. Some of my colleagues snickered (“There goes Kevin again”) and some audience members looked puzzled. After all, nobody in the mainstream press talked about higher food prices or the coming rally for agriculture, and now we seem to hear about them every day.

Times are certainly getting tough out there. Hey, I’m just the messenger.

Yours for resource profits,
Kevin Kerr
May 8, 2008