Trading Grains Can Deliver Serious Gains
In the past, at least for most of my 17-year career, the commodities markets have been a small part of the overall investment picture for most investors. The NYSE pooh-poohed the commodities exchanges as a form of gambling or worse. Average investors had little access to these markets, and those who did often came away feeling confused and disenchanted. Fast-forward to today, and all of that is out the window. The electronic age has made global commodities futures and options accessible around the clock and much easier for the average investor to understand.
In the past, key commodities markets like gold and oil were the only ones you would hear mentioned in the mainstream press.
Again, all of this has changed, as the commodities markets have evolved. One sector that was mainly reserved for farmers and professional speculators was the grain markets. With the resurgence of ethanol and biofuels, these markets have suddenly become more precious than gold.
Let’s take a look at a few grains, and show you how to use them to your advantage…
Corn’s Explosive Run Won’t Stop Anytime Soon
Ethanol, ethanol, ethanol. In the last few years, due to the ethanol craze, the grains everyone’s heard about are corn and soybeans, and these grains are the most actively traded.
Corn has absolutely been on an explosive run, and the cash and futures prices are soaring, allowing savvy investors to make a fortune playing corn directly. The main cause is the ethanol plants springing up right and left across the country. It’s almost as though you can’t turn on the TV or pick up a magazine without hearing or reading about it. The demand for ethanol is real, and even though the science of ethanol is still questionable, the reality is that it’s now the primary blending ingredient for gasoline. Ten percent ethanol is pretty much standard now at the gas pump, and in many states, E85 is taking hold. E85 is 85% ethanol.
While the arguments rage on about whether or not ethanol is the answer to our fuel needs, the demand is already here. Until there is a viable alternative or a repeal of the 54-cent sugar tariff in the U.S., corn-based ethanol is here to stay, even though there are other alternative energy sources that are much more efficient.
So clearly, corn and sugar are two commodities destined for much higher prices. In the rush for corn and soybeans, one grain that’s being overlooked is wheat.
Can You Really Profit Trading Wheat? YES!!
Wheat is one of those commodities that isn’t sexy. It’s not gold and it’s not oil, so it’s not that exciting to talk about at the club — but there is real money to be made in the wheat market right now…my readers of Resource Trader Alert have been able to make 62%, 68% and even 174% from the options I’ve recommended on wheat.
Still, very few people are talking about wheat — at least for now — and that’s good news.
I grew up in Minneapolis, Minnesota, born and bred. Minneapolis happens to boast the largest cash grain market in the world. There is a small futures exchange and it trades wheat. Chicago also trades wheat and is where I usually suggest you trade. However, wheat is also traded in Kansas, and although the market is a bit thinner, it can sometimes work to your advantage. Some of the best markets to trade are the ones you never hear about in the mainstream. With the grain markets moving so fast even wheat is picking up steam and the trading action is like a tornado.
Kansas City wheat is the second most actively traded wheat contract after Chicago. The reason the KC wheat is special is that it’s the hard red winter wheat. This type of wheat accounts for about 45% of total wheat production in the U.S. and is a higher quality wheat that’s used to make food products. It’s more easily refined and milled.
Last summer, the United States Department of Agriculture said 49% of the spring wheat crop was already harvested and only 32% of it was rated good to excellent. That’s down from 67% a year ago. This year may be even worse, and demand is growing.
The situation gets even grimmer as the United Nations Food and Agriculture Organization is reporting that nearly two-thirds of the winter wheat crop in western and northern China has been wiped out by a prolonged drought. Some other areas have experienced a 40-50% cut in the winter wheat harvest.
The rumbling in the pits is that red winter wheat, while volatile, is one of those crops that simply will go higher in the long term, due to increased demand and ever-decreasing supply. Sounds like a good time to buy.
These Forgotten Grains Could Bring Big Gains
The grains used to be pretty obscure to most investors, and certainly there were no respectable Wall Street traders who looked at corn charts (or at least admitted it). Now if traders aren’t looking at the grain charts, they’re considered strange, so times change.
Other than corn, sugar, soybeans and wheat, there are many other smaller grain markets for the more aggressive investors who want to do their research and take a little more risk.
Canola, oats and a more mainstream commodity like rice are all more markets to take a look at. Personally, of the three, I would look at rough rice. The futures contract is pretty liquid, relatively speaking, and it can be a good-trending market. It certainly doesn’t get as much attention as corn or soybeans, but that can be a good thing.
Sure, corn and soybeans will remain the front-runners in the grain race, but the rush for profits and the ethanol hysteria (like the new gold rush) is far from over.
I could list about 50 more reasons to buy grains right now, but the bottom line is that these markets are very strong and this trend is likely to continue.
The grain charts have risen so fast they will give you a nosebleed if you look at them, but don’t let that deter you as bull markets often have charts like that. As always, use protective stops and a strong defensive trading strategy in these markets, because a correction is always possible.
Yours for resource profits,
June 8, 2007