I’d like to focus this week’s segment on the markets that typically see heightened activity during the summer months, due to the fact that it’s their prime growing season. Specifically, that means the grains and orange juice markets.

As we’ve mentioned before, these products are heavily dependent on the weather for their yield. So if erratic weather patterns affect the crops’ growing cycles, it’s very likely that their prices will rise.

These products aren’t just consumables either. The farmers and food/drink companies that are front-and-center of their production use these markets for income production, too. They do this by using commodity futures and options contracts as hedging mechanisms.

So let’s hit the grains market first…

Bull-Hunting In The Corn And Wheat Markets

In the last issue, we keyed in on corn and wheat, stating: “Most of the speculators who play these markets are bullish in nature, so a majority of them are placing bullish bets, either in the form of outright long futures contracts or long call option contracts.

“Right now might be one of the best times to get into the grain markets on the long side because not only are we right smack in the middle of summer, but the prices of corn and wheat have just undergone a five-week massacre to the downside.”

Both markets are still meandering around their lows, which offers another good opportunity to get in on a speculative bullish move. Here’s how to do it…

How To Play Grain Market Upside

Take a look at the daily charts below for the corn and wheat December 2009 futures contracts.

If you believe in the seasonality of bullish moves for the grains, and are willing to take a speculative bet, now is a good time to consider a trade.

Your best bet is to hit the futures options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). But make sure you do so in a way that gives you limited risk (through call option spreads, for example) and unlimited reward possibilities (through outright call options).

For call options, look to play the December 2009 or March 2010 options expirations, which will give enough time for any major weather scares to produce a good upside run.

Corn: Specifically, consider December 2009 & March 2010 call options with strike price levels from $3.50 and higher.

Wheat: Use the December 2009 and March 2010 call options that have strike prices between $5.60 and $5.80, or higher.

You can also trade these contracts through the Chicago Mercantile Exchange’s electronic platform, where you can bypass the brokers in the option pits. These contracts are exactly the same as the other, so you can trade them whichever way works best for you.

Juicing In July

Having last broken down the orange juice market one month ago, this market has become a hot spot for speculators, as hurricane season got underway.

At the time, the market had carved out a low and we mentioned that it was shaping up for a “potentially lucrative seasonal trade.”

It certainly didn’t disappoint. Over a two-week period, orange juice futures launched higher to the tune of 2700 points. Usually, a move like that will take a good portion of the summer to develop, but with the oversold conditions that existed, it was stronger and quicker than normal.

This served all call option buyers well – especially those who took our advice to buy the January 2010 $85 cent call options. At the time, these options were available to buy for roughly 900 points or lower. And with the 2700-point surge, they tripled in price, fetching prices of over 3000 points.

So what now?

At this point, we wouldn’t advise buying these options anymore. The feverish move has already happened now and OJ prices are beginning to fall back. This is usually a one-time event every year, and unless orange juice drops back down into the low 80-cent area quickly (based on the January 2010 futures), we don’t recommend buying calls at this time. Markets move fast and timing is very crucial.

Lastly, we’ll take a quick look at our other favorite “weather-prone” commodity – natural gas…

Natural Gas Needs A Hurricane-Induced Boost

We’ve been bullish on natural gas for a while now, as it slinks along the lows it’s carved out since it reached manic highs last summer (along with many other commodities).

Natural gas will eventually hit a bottom, as it’s an in-demand natural resource that will be around for a long time. We just have to wait patiently for the turnaround, as the market grapples with high underground storage supplies.

Like with the orange juice market, though, we know hurricanes can cause huge upside moves, as the majority of drilling rigs are centered in the Gulf of Mexico. If a few storms go rumbling through that area, it could be the impetus that eventually brings this commodity out of the doldrums. But until then, we’ll bide our time.

One of the ways we’re playing this market in my Instant Money Trader (IMT) service is by selling out-of-the-money naked put option contracts on the natural gas exchange-traded fund - United States Natural Gas(NYSE: UNG).

This ETF tracks the movements of natural gas futures contracts, giving investors a lower cost way to enter this market.

And by selling put options, it allows us to collect the option premium, while having an opportunity to buy natural gas at unbelievably low historical levels. Check out this article for more information on how to sell put options.And to get on board with IMT, just visit this link.

Source: Grain Hunting: How To Cash In On  The Corn And Wheat Markets

Gary lives in one of Iowa’s most productive farming counties. He helps local farmers sell their harvest using the futures and options markets in Chicago. He also makes million-dollar speculations of his own.

Gary really knows the “ag” markets. He used to be the head stock buyer in a cattle yard, he’s traded ag commodities every day for the past 40 years, and he spends all day talking with farmers.

The last time I met Gary – in November 2006 – he told me this:

“Corn is going to $5 a bushel, up from its current price of $3.33. Soybeans are going to $9, from their current $6.45. And Iowa farmland is a bargain at $5,000 an acre.”

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Today, corn is $6 a bushel, soybeans are $13, and prime Iowa farmland is $10,000 an acre.

Back then, it was obvious grain prices had to rise. They were too cheap, and with the ethanol boom in full swing, it was plain to see corn and soybean prices would rise. Now it’s not so clear…

Gary says a bad crop could send corn to $10. But that’s not likely. The farmers are planting their fields right now, and Gary thinks there’s going to be a big crop this year. That could push grain prices down.

Gary wouldn’t predict a fall or a rise in the grain markets. He can’t know the future. But he did tell me he had sold all the grain production from his own farm, locking in corn prices at $5.80 and soybean prices at $12.80.

While it isn’t clear what’s going to happen to the grains… Gary said hog and cattle prices have to rise. Here’s why:

A knife is made out of steel. The knifemaker simply turns a raw material into a more expensive “value added” product. The hog and cattle farmer does the same thing. Corn is the raw material. Hogs and cows are a value-added corn product. Think of livestock as corn bins with four legs.

When steel prices rise, the knifemaker has to raise his knife prices or he’ll go out of business. Farmers haven’t been able to raise hog and cattle prices. Years of cheap corn have built up large inventories of meat.

Now the hog and cattle farmers are going out of business. Soon there’s going to be a shortage and prices will rise. “There’s going to be drastically higher meat prices when all this washes out,” Gary said.

To invest directly in hog and cattle prices, you have three choices: You could make friends with a farmer and ask him to buy livestock for you. You could open a futures trading account and buy live hog or feeder cattle futures. (Prices are volatile. Make sure you use plenty of margin and retain a broker who knows the agriculture markets well.)

Finally, you can buy a publicly traded meatpacker like Tyson, Hormel, or Smithfield. But be careful… other “corporate” variables may influence the prices of these stocks and ruin the trade, even if livestock prices rise.

Good investing,

Tom Dyson