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…

How To Play The Grain Market Upside With Commodity Futures

A few weeks ago, 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 commodities 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…

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 and unlimited reward possibilities.

For example, that could include entering a call option spread or just buying 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.

The Orange Juice Markets – A Hot Spot For Speculators

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.

Let’s take a quick look at our other favorite “weather-prone” commodity – natural gas…

Commodity Futures – Waiting on a Natural Gas Bull

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.

Source: Commodity Futures: Playing The Grains & Orange Juice Markets

Since many of these commodities are real physical products that we use for consumption purposes, it’s no surprise that these markets rise in price whenever investors suspect an oncoming deficit.

Specifically, grains and other foodstuffs are at the mercy of Mother Nature from the time they are being planted until they can be brought to market. Right now is one of those critical periods, and with that in mind, we’re going to discuss the sectors that are most volatile during these summer months.

Get Going With The Grains

Applied to the commodities market, “the grains,” consist of corn, wheat and soybean futures and options contracts. We see the most speculative interest in these markets from all kinds of participants as what happens often happens fast, with big rewards for those people who know how to play it right.

From May to October, the grains go through their most critical growing cycles, when they rely heavily on ideal weather conditions in order to produce the most bountiful crops.

Of course though, we all know the weather doesn’t always remain ideal just because we ask it to.

And even when the sun does shine when it’s supposed to and the rain falls perfectly on schedule, there’s usually one reason or another to forecast doom and gloom… a shortage of one element, an over-abundance of another, factors that can hinder the crops from meeting their full potential.

Those same variables that have farmers tense and impatient during the summer months, give investors plenty of opportunities to profit though, as the uncertainty more often than not leads to manic moves in the market.

Why The Bulls Are Set To Run Once Again

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. Not only are we right smack in the middle of summer – a season known for it’s weather anomalies – but the prices of corn & wheat have just undergone a five-week massacre to the downside.

With corn and wheat futures hitting very oversold levels, it makes your chances of being profitable with a bullish trade, that much more probable.

If you need further proof, take a look at the daily charts below of December 2009 corn & wheat futures contracts.

Notice how each commodity appears to have fallen off a cliff since early June. This was due to the most recent government supply/demand data showing sizable supplies and planting intentions for each.

Their Panic Is Our Profit

Over my 17 years in the commodity business, I’ve found that nothing can get in the way of a bull run whenever there is a perception that a crop will get wiped out if growing conditions aren’t perfect. It happens every summer, and this one shouldn’t be any different.

If you’re on board with me in this and want to take part of the speculative fever, then your best bet is to go with options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). Stick with limited-risk call option strategies that are for the December 2009 expiration cycle or beyond, as they provide enough time for any major weather scares to still produce a good upside run.

You can look at the December 2009 corn options with strike price levels from $3.50 and higher. And use the December 2009 options that have strike prices of $5.50 and higher for wheat.

Outright call option purchases and call option spreads are a great way to get your feet wet in these markets.

Soybeans, which probably see the most volatile moves during the summer, did not get hit as hard to the downside recently as corn & wheat, so the advantage isn’t as high in that product right now for bullish bets.

Although soybeans could rise as well with any weather interruptions, we like the chances better with corn & wheat.

Orange Juice Futures Could Still Climb Higher

On a final note, I want to draw your attention back to the analysis we did on the orange juice market in the last Commodities Corner.

Right on cue, orange futures have blasted higher in the last few sessions to the tune of 1800 points, putting any recent call option purchases from last week squarely in the black.

This market could remain active over the next few months as the weather, in the form of hurricanes, can send this market to dizzying heights.

Good trading!

Source: How To Play This Government Report And The Ensuing Commodities Craze

That’s because wealthy populations tend to eat more meat than poor ones, while also eating more fresh fruits and veggies. The diet becomes more diverse, less centered on consuming base grains.

The demand for grains doesn’t diminish, though, because the need to produce meat increases the demand for grains exponentially. Depending on who’s doing the math, five to ten pounds of grain goes into every pound of beef that lands on a dinner plate.

China’s population is also increasing, of course, which is further boosting demand for grains. There are some special issues with China, too. It holds only 10% of the world’s arable land, but 20% of the population. And its arable land resource is in decline. There were about 121 million hectares in service at the end of 2008. That’s down from 133 million hectares as recently as 1988. Increasingly, because of water shortages, desertification, development, urban migration, pollution and a host of other reasons, China is growing less of its own food and relying more on foreign suppliers.

The Chinese government is not happy about that trend and has made food production a priority. In fact, recently, the Chinese premier laid out a number of goals for China:

• Boost Chinese grain production by 50 million tonnes by focusing on increasing the yield per acre
• Subsidize agriculture – which the government does by giving farmers subsidies for irrigation equipment and new seeds and for improving crop yields and crop quality
• Invest in the infrastructure of agriculture – for water supplies, roads and the like.

So it would seem a good idea to be around Chinese agriculture in some way.

Let’s back up a bit and look again at how the dietary pattern has changed. I’ve written about how China consumes a lot more grains before. China is now also one of the largest consumers of fruits and vegetables.

That China is now a consumer of size in the world of fruits and veggies is a relatively new development. China is also a big producer of fruits and veggies. According to the FAO, China produces nearly half of the world’s vegetables and 16% of the world’s fruit. China is today a major exporter of these goods to other Asian countries, supplanting U.S. suppliers.

Well, fruits and veggies have an interesting angle when it comes to fertilizers…

You know if you’ve been reading this letter that the three main nutrients are nitrogen, phosphate and potash. Farmers use fertilizers to boost yields and improve crop quality. Perhaps not surprisingly, China is the largest consumer of fertilizers in the world, with about 25% of global demand.

China is self-sufficient in nitrogen and phosphate. As a result, its application rates are on par with those of farmers in Europe and America. But China is not self-sufficient in potash. The country has few developed potash mines. As a result, it consumes around 12-15 million tonnes per year, but produces only 3 million tones.

Therefore, China relies on imports of potash to obtain most of its supply. But Chinese farmers could use a lot more of this unique fertilizer. In fact, China’s potash “application rates” are half what they are in the West. Quite simply, the Chinese need to use more potash to boost their crop yields to where the U.S. and Europe are.

Potash is an important nutrient because it controls the plants’ water intake, reduces water loss, increases root growth and improves drought resistance. Clearly, crop yields are higher and crop quality is better with the application of potash.

Yet last year, China’s consumption of potash fell. It will probably decline slightly again this year. That’s incompatible with the goals – and the need – of increasing crop yields and quality.

Potash prices soared in 2008 and Chinese farmers pushed back by buying less. The price of potash is cheaper now, but not by all that much. In any event, the Chinese farmers can afford it, as the economic return from using potash is compelling. This two-year decline in potash consumption is unprecedented. And its effects on crop yields and production will not be good.

Most of the potash suppliers that deal in the Chinese markets believe that Chinese demand will pick up later this year as the Chinese burn through their existing inventories of potash and look forward to the 2010 planting season. The Chinese will be hard-pressed to match the record production of 2008 without potash. The quirky thing about potash is that it tends to stay in the soil and you can skip a year, maybe even two, but no more than that.

So potash is also going to be a good way to invest in China’s food story. But there is another layer here.

You see, you can’t use potash directly to grow fruits and veggies. These crops – tomatoes, avocados, melons, etc. – are sensitive to chloride and salt. So you have to modify the potash and remove the chlorine. These potash-based fertilizers, potassium sulphate (SOP) and potassium nitrate (NOP), are ideal for fruits and veggies.

As it turns out, you also need SOP and NOP to grow tobacco. Tobacco is fussy about what fertilizer it will take without messing up its taste or combustibility. It also needs a lot of potash. Yet again, chlorine is a detriment. Chlorine makes the leaves taste sour and can destroy the commercial value of a crop. As with fruits and veggies, you need SOP and NOP.

Selling SOP and NOP to China’s tobacco farmers is also a good business. For one thing, China has the largest population of smokers on the planet, some 350 million. Since potash represents less than 1% of the cost of making cigarettes, the tobacco growers are less price sensitive. What they really want is a quality product consistently delivered.

One of the companies I’m following is the largest producer of SOP and NOP in China and serves both the fruit and veggie market and the tobacco growers. But there are really many ways to get a hand in the Chinese agricultural story. Watch this space.

Source: Buy What China Buys, Part II

Turn on the printing presses, impose lots of new taxes and regulations, eat the rich. But… America is now the world’s largest debtor nation. What will our foreign creditors and trading partners do if the dollar continues to fall? If the rice market is any indication, we will face dozens of additional export restrictions, as more and more countries refuse to accept the U.S. dollar in trade. I wonder what will happen then? Perhaps a war to gain access to raw materials? Canada, be careful.

You think that sounds crazy, I’m sure. But listen to what U.S. Sen. Chuck Grassley told reporters recently: “If part of our problem is that the Chinese are going to eat meat and you’ve got to have corn and soybeans to feed the Chinese their meat, then why isn’t it just as legitimate for the Chinese to go back and eat rice as it is for us to change our policy on corn to ethanol?”

Here you have a United States senator suggesting our most important foreign creditor should eat rice so we can power our SUVs with corn-based ethanol, the production of which actually consumes more energy than it produces. It’s not often I’m surprised by the stupidity of our government officials. But this one got me. Grassley would be wise to consider that the Chinese can afford to pay higher prices for grains, because their currency continues to rapidly appreciate versus the dollar. Meanwhile, we’re going to have a hard time buying rice if the Chinese don’t lend us their savings.

I wonder what our readers make of these events – of U.S. citizens demanding to keep their homes even though they can’t pay their mortgages; of U.S. senators demanding our trading partners stop buying our corn; of major retailers placing limits on the purchase of rice; of banks blowing up day after day; and of the dollar falling from one new low to the next.

We’ve been advising people to buy gold and silver for at least the last five years as a hedge and protection against the risk of hyperinflation. Now, it has arrived. But how many subscribers, I wonder, have bought gold or silver? My bet? Less than 10%. It’s still not too late, though. And our own Matt Badiali has found a way to buy gold and collect big dividends, too. Click here for the details.

The IRS started mailing the economic stimulus checks this week, and Goldman Sachs already compiled a list of the 10 companies that will benefit most from the extra cash: Cheesecake Factory, Best Buy, Darden Restaurants, Home Depot, JCPenney, Kroger, Kohl’s, Royal Caribbean, Safeway, and, of course, Wal-Mart. Wal-Mart was an easy guess considering that 8% of U.S. retail sales already go there.

From a reader: “Why are your recommended trailing stops always 25%?”

In my newsletter, I frequently adjust the stops of my positions based on the risk of the investment and our desired holding period. But a 25% stop loss is a good place to start. With an initial allocation of 4%, a 25% stop loss puts 1% of your original capital at risk.

If you use a trailing stop loss and the position moves up at all, your principal at risk can quickly fall to zero. Using stop losses and trailing stop losses must be done in conjunction with position sizing. The goal is to minimize the impact of any loss. Once you learn to avoid big losses, you’ll find it’s much easier to make money investing.

Billionaire real estate mogul Sam Zell is buying Brazil, “It has the chance 30 years from now of being a bigger economic power than China,” Zell told the Milken Institute Global Conference. Zell said the country’s 180 million people, skilled work force, and wealth of natural resources has made it largely self-sufficient.

He also mentioned Brazil’s biggest mall operator was seeing retail sales growth of 10% annually. And what’s stopping China? The country’s one-child policy, which Zell believes will decrease the number of workers in China and “come back to bite them big time” in 2020.

International Strategist editor Tom Dyson is also hot on Brazil. He took an agricultural tour of the country earlier this year. In his travels, he found the future of the world’s agricultural production, Protein City. This mega complex will produce the world’s cheapest commodities and make an absolute fortune shipping them all over the world. Tom found the best way to profit from Protein City, and his pick is up 25% in less than two months.

Tom holds three Brazilian stocks in his portfolio, all three are up double digits. And he’s got three more Brazilian stocks on the radar. To learn more about International Strategist, click here…

Regards,
Porter Stansberry and Dan Ferris

It’s the perfect storm for investors – especially when just about everything else in the investment world has continued to post big declines since last July.

Best of all, you don’t have to purchase futures and options contracts to invest in these commodity gems. I should know. I’ve been researching and recommending commodities since 2002 in my Commodity Trend Alert (CTA). So I know it’s never been easier to trade raw materials with zero leverage and no margin!

Hot Commodities for Everybody

Commodity service-providers have launched a blizzard of exchange traded funds (ETFs) over the last 12 months. These new ETFs allow both individual and institutional investors access to hot commodities like coffee, wheat, sugar and corn, to name only a few.

It’s no wonder investors have poured an extra US$30 billion into commodities within the first 60 days of the year alone compared to just US$10 billion in 1998. The boom has arrived and everyone wants a piece of the action as the dollar slides, rates plunge and emerging markets feed their bustling infrastructure and populations.

Negative Correlation to Stocks is What Makes Commodities So Tempting

Commodities, and soft agricultural commodities in particular, are not tied to stocks, bonds or currencies. They’re not correlated to any of these markets directly. Therefore commodities provide a critical asset-allocation diversification strategy to traditional portfolios.

Indeed, as global stocks plunged the first 75 days of 2008, commodities continued to hit new record highs. The soft edibles have led the charge with big gains.

Recently, commodities have started a long-awaited correction after almost seven months of blistering gains – even as global stock markets entered bear market territory. Some bears point to a “bubble” in raw materials while others exclaim the Federal Reserve will eventually start raising interest rates again to cool rising inflation, supporting the flagging U.S. dollar. I seriously doubt that.

Facts are the United States can’t afford high interest rates for the foreseeable future because the financial system is coming undone. The Fed will continue to pump massive amounts of credit in the system. Bernanke and his boys will continue to bailout institutions that they believe pose a systemic threat and they’ll do whatever they can to act as lender of last resort in the worst financial crisis since the 1930s.

This Isn’t the NASDAQ – or the Volcker Fed

“Commodities in the 2000s are what the NASDAQ was to speculators in the 1990s.”

That’s a common misperception placed about commodities today because people assume that because the gains have been so spectacular that the cliff can’t be far away. They also point to how technology stocks went wild in the late 1990s with billions of dollars chasing the NASDAQ. We all know how that frenzy ended. Eight years later, the NASDAQ still trades more than 60% below its all-time high in March 2000.

To be sure, raw materials have enjoyed spectacular gains since bottoming in late 2001. Some sectors, mainly the base metals, are overbought. You should avoid these few overbought sectors, and possibly short them using reverse-index ETFs. But the rest of the complex, despite posting big gains lately, remains well below its inflation-adjusted highs back in 1980.

Wheat is still 150% below its inflation-adjusted high, corn is 62% off and soybeans still 60% below its best level.

The main difference between technology stocks and commodities is consumption. A few billion people every day consume raw materials while tech stocks mostly suffered from a mirage of negative earnings, negative cash-flow and absurd valuations.

Thirty-five years ago, the world didn’t have China and many other emerging markets rapidly industrializing. More than two billion consumers have entered the global trade picture. Whether we like it or not, the future of capitalism lies in the east, not in the west.

If the Fed was aggressively fighting inflation, then commodities would be dangerously vulnerable. But that’s simply not the case. In fact, it’s far from reality. This isn’t circa 1980 when the Volcker Fed was busy fighting 13.6% inflation and raising rates to a crippling 21%.

Commodities feed on easy money or low rates, a declining dollar and most of all, falling production coupled by rising demand. That’s exactly what we’ve got in 2008.

We are back among civilized people. People who worry about money, that is.

So, what has happened in the world of money since we were gone?

Not too much, apparently.

U.S. stocks are still down about 7% for the year. The NASDAQ has lost 12%.

The dollar is still near its all-time low against the euro, at $1.57. And the yen, too, is near an all-time high. And gold?

Maybe we were right. Maybe we just had our last chance ever to buy gold for less than $900 an ounce. And maybe what we have now is our last chance to buy it for less than $1,000. The price today is $931.

Now, you can still get in on gold at just a penny per ounce, but only for a limited time. Start collecting the change off the floor of your car and click here .

We are bullistic on gold because we are realistic about human nature. Give someone an opportunity to print money and you can be sure that sooner or later, come what may, he’ll take it.

The feds no longer tell us how much money they’re ‘printing,’ but experts say M3, the broadest measure of new money creation, is higher than 15% per year. Let’s see, money increases at 15% per year…and how fast is the supply of goods and services increasing?

Uh-oh…the IMF says the United States is headed for recession. Some economists think the country is already in recession. What that means is that the supply of goods and services is barely increasing at all. Which means, the extra money has to bid for the EXISTING goods and services.

No need to beat around the bush about it. What this means is that monetary inflation is driving up prices.

The price of oil is $112. Wheat, corn, soybeans, rice – all the grains are near record highs too. Many countries are banning exports. Many are controlling prices. (See below…) Mexico, for example, has price controls on tortillas.

Of course, the real cause of rising food prices is a falling value of paper money. But only the European Central Bank seems to take its mission to protect the euro seriously – it’s holding rates steady. While the ECB tries to hold the line against inflation, the rest of the world’s central bankers are giving inflation all the slack they can. The Bank of England, following the U.S. lead, cut its key rate yesterday by a quarter-percentage point

Let’s go back to our war analogy. It’s a battle between the forces of inflation and the forces of deflation, we keep saying – one side unstoppable…the other immovable.

But what kind of war is this? Glad you asked because we were thinking about that very question as we sat in front of the fire up in the mountains yesterday.

The Franco-Prussian war of 1870 was a great war. The French declared war on the Germans, for some reason that no one seems to recall. The Huns attacked, rolled up the French army …and laid siege to Paris. In the city, residents soon had to eat rats and cats to stay alive. Parisians exchanged recipes and made the most of it.

The whole thing was over fairly quickly. The Frogs capitulated, agreed to pay reparations, and the Germans withdrew (keeping the Teuton-speaking area of Alsace.)

It was a nice war because it had a clear winner…and because it was over like a good street brawl, before the cops came. And the Germans were very civilized about it. They didn’t set up bases in France. They didn’t stretch out the war for years…or make the French learn to speak German. They won it fair and square, and then went back to their strudel and frauleins. Which made Europeans think that war was not such a bad thing.

Then, came WWI. Oh la la…this was a war of a different sort. It went on for four years. At enormous cost to everyone…millions of dead…trillions in financial losses…

…and who won? Nobody.

We bring it up because this financial battle looks to us like that kind of war. A war of liquidation…in which people lose money they thought they had – either to inflation or to deflation.

Yesterday, Lehman Bros. liquidated three of its funds. And, as mentioned above, a big part of the stock market has been liquidated. And housing gains are being liquidated at about 10% per year…

…and remember, inflation liquidates almost everything…including the value of American labor. As consumer prices go up and the dollar goes down, the relative price of American labor falls. The working man is liquidated.

Check out a chart showing the Q1 2008 action in the CRB Index, a widely tracked basket of 19 leading commodities, versus the S&P 500 from the beginning of the first quarter through Tuesday. The CRB Index is up 11% during that time frame. Meanwhile, the S&P is down over 7%. OUCH! Which would you rather invest in?

Investors are asking themselves this question and voting with their funds. According to a report just released by Citigroup, global investments in commodities rose by more than 20% in the first quarter to $400 billion, helping boost prices as investors sought protection against inflation and a weaker dollar.

The report says that investments in commodity indexes rose $40 billion in the first three months of the year to $185 billion, a larger gain than the whole of 2007.

A “tidal wave of investment flows into commodity markets has further boosted prices,” the Citigroup analysts said, quoted by Bloomberg News. “The weakening U.S. dollar has been the main macro force attracting funds to commodity markets. Other contributors are falling real interest rates and inflation worries.”

How do we square the strong rallies we’re seeing in oil, gold, grains and basic materials with forecasts some are making for a global recession? Answer: Somebody is obviously wrong. You can’t have demand and prices soaring at the same time that a global recession is taking place. Our solution is to follow the money — and bet on commodities. We think the next tidal wave of wealth pouring into commodities could be a real doozy.

Yours for trading profits,

Black Bear
The Secret Order of Jurojin

P.S. If you’re interested in profiting off that wave of wealth pouring into commodities, check out The Secret Order of Jurojin. We make recommendations in the potentially profitable futures market.

I do have to admit, futures aren’t for everyone. You have to have a larger tolerance for risk to trade futures. And as with all investments, some trades win and some trades lose. But we have a good system for helping subscribers manage risk, and you can target potentially bigger rewards.

If you’re one of the select elite of investors… if you’ve got the big brass ones it takes to trade futures and futures options, then The Secret Order of Jurojin could be for you. The commodities boom is soaring, and the potential profits are yours for the taking. Sign up today at Jurojin Weekly.