Underground investor Jim Rogers is also bullish on agriculture. He says Asian demand and low inventories will lead to a long secular bull market in corn, soybeans and fertilizer.

As Brian Hunt wrote in yesterday’s DailyWealth:

DBA “is one of the largest and most liquid ways to trade agriculture through the stock market. It divides its holdings evenly between corn, soybeans, wheat, and sugar.”

From this chart, you can see that DBA is has been showing some strongly bullish action lately. And it has the Jim Roger’s seal of approval.

This chart shows the price movements since the beginning of the year of the Powershares DB Agriculture Fund (NYSE:DBA). It represents a basket of futures contracts for commodities such as wheat, corn, soybeans and sugar. As Justice says, “Commodity after commodity has roared back to life, thanks to a combination of renewed inflation expectations, a crashing U.S. dollar, and newly bullish fundamentals.”

Last Thursday, we discussed at length the effects that inflationary expectations are having on the market. We said that Treasuries were a bad place to be and that energy-related commodities such as uranium and lithium were likely winners in an inflationary scenario. Justice points out that corn, soybeans and sugar are worth considering.

Corn prices surged to a six-month high,” Bloomberg reported earlier this week, “after the U.S. government said domestic demand will exceed production for the third time in four years, slashing reserves by 28%.”

Corn inventories are expected to fall even as the various demand sources for corn – food, livestock and fuel – rise an estimated 3.5% next year.

Soybean prices, meanwhile, recently hit seven-month highs on the CBOT (Chicago Board of Trade) after U.S. stockpile forecasts dropped. Beans were also boosted by word that the Brazilian National Agriculture Confederation, a major farm lobbying group in Brazil, would press for limited soybean acreage in the coming planting season to help keep prices firm.

And finally Sugar, not to be outdone, recently hit 34-month highs – their highest level in nearly three years – on “poor crops and robust demand,” according to the Financial Times. A failure of India’s local sugar crop was seen as a big price booster. “Swings in Indian sugar output, which move the country back and forth from exporter to importer, are a critical factor in global prices,” the FT reports.

“The price of lumber is a fair indicator of where the market is headed,” says Tom Dyson in last Friday’s DailyWealth. Lumber is an “on-demand” market. That means prices are set by real commercial demand (not the pie-in-the-sky nonsense we’re seeing in US equities right now). This from Tom:

Take the 2008 credit crisis as an example. The lumber price was the first to signal a bear market was coming. It peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. The Case-Shiller U.S. home price index peaked in July 2006. The credit crunch started in February 2007, when New Century Financial collapsed. And finally, the S&P 500 peaked in October 2007.

Everything fares well for Brazil.  Good news abounds and everyone is joyful… All is well?  No, not everything…. The inflationary specter has returned to frighten and preoccupy Lula, who up until recently had everything going well this year.

However, while everything was going well and the economy grew, so too did inflation, reaching 0.79% in May, the largest increase in the last 12 years.  So far this year retail inflation has reached 2.88% and 5.58% for the last 12 months.

And while it is true that inflation remains within the generous goal of two percentage points going either way, currently it is less than a percentage point from reaching the upper limit and is threatening to continue to rise.

Making matters worse, the inflation is making the poorest of the country its primary victim as food prices in May increased 1.95% (for an increase of 6.4% the last 12 months).

Is there a problem with an inflation level of 5.6%?  By comparison, Brazil is surely the envy of countries such as Venezuela and Ecuador.  However, the truth of the matter is that it is imperative to get levels such as these under control.  This is desirable not only because this level of inflation greatly affects the purchasing power of Brazilians (and it does), but also because it runs the risk of taking on a life of its own.  This in turn creates a vicious cycle, increasingly difficult to halt, for as food prices rise, the workers ask for higher wage increases (thus spiraling the situation out of control).

What will Brazil do to restrain the price increases?

In a similar situation, Argentina decided to limit its food exports (meats, wheat, corn, and the like) and the result was clearly different from that which was intended. Argentina now has an inflation problem far more serious than the one it had two years ago, only this time the situation is exacerbated by the fact that export revenues have been affected as well.  The higher inflation has stopped all investments in the economy, and Argentina was granted the investment rank of a “country not to be trusted”, due to the fact that they are now receiving less income from exporting meat than Uruguay does.

Perhaps it has not crossed Lula’s mind to limit food exports thanks to Argentina’s negative experience.

Brazil is one of the world’s largest food suppliers.  At a time of increased food production, it must now face a rise in food prices that is continuing to worsen.

Noting this situation, the Central Bank of Brazil has maintained a strong commitment to the stabilization of prices and it is clear from their demeanor that they are able to act independent of government constraints and that they are prepared to take whatever measures are necessary, including raising interest rates, to avoid runaway prices.

The Brazilian government’s Monetary Policy Committee (COPOM) Wednesday announced an interest rate hike of 50 points to 12.25%.

Brazil is showing how to combine long-term policies with measures directly related to the current situation… But how?

To clarify things: with this monetary policy, Brazil insures control of inflation using traditional methods. Since these efforts are directed at correcting the effect of rising prices, it fails to resolve the problems associated with the deterioration of the income level for the people.  Since taking office, Lula has been making plans to develop measures intended to address the needs of Brazil’s poor.  One of his plans is to increase the Family Scholarship Program’s funding to assist about 40 million Brazilians at a cost of around 11 billion reales (about U$S 6.75 billion) amounting to a 6% increase for each beneficiary (although Lula would like to see that rate a little bit higher).

Additionally, Lula has not only adopted a cautious position, but has also demonstrated sound judgment that has enabled him to take advantage of opportunities as they arise.  And this is important when one considers that increases in food prices are expected to continue for several more years.

As a result of this, Lula is creating programs to improve food production and the provision of necessary supplies (such as fertilizer).  Brazil is already contemplating measures to stimulate the growth of food production through its Program for Industrial Development (Programa de Desarrollo Industrial).

Brazil is doing well so far and that is why they are taking the current bad news so calmly, because the have confidence that the problems confronting them will be solved sensibly through strategic vision.

We will meet again tomorrow,

Horacio Pozzo

“Corn is in trouble because of the wet spring that has drenched the midwest,” says Justice Litle in Taipan Daily.

Yesterday, the USDA said in a report that American corn output will be down significantly from last year’s estimate.

And that forecast was put together before the biblical drenching the Midwest suffered in the past week, when another 12 inches of rain flooded already saturated fields.

All this is sending corn futures soaring. Looking at the chart, you can see how corn has gone ballistic. Also, on the bottom of the chart, RSI (a momentum oscillator) has just given a bullish buy signal.

After this latest rainout, many corn farmers will switch to soybeans, which can be planted until the end of June with less impact on yields. And that means the corn that does grow will be much more valuable.

Jurojin already recommended our subscribers go long corn last week — after it bounced higher off of its 50-day moving average. Now, they’re racking up nice open gains, and our first profit target looms dead ahead.

Is it too late to get in on corn? Not by a long shot. We’ve seen this kind of horrible start to the crop year before — in 1993. Then, traders were slow to react to massive flooding.

The best way to play this is corn futures or options on corn futures. If you aren’t in the futures market, you could try the PowerShares DB Agriculture ETF (DBA), which tracks a basket of corn, wheat, soybeans and sugar.

“Corn is going to go higher,” says John Mauldin in his Outside the Box.

Bad weather has meant that not enough got planted, and that will probably hurt yields in the fall. This is going to mean even higher meat prices and ethanol prices. Corn ethanol is such a bad idea. This is what happens when government decides to mess with the market.

Anecdotal inflation note: I eat two chicken fajita pitas without cheese from Jack-in-the Box for lunch about three times a week (after the gym!). I throw away the pita bread and just eat the chicken at my desk. The last three days the price has been the same, but the amount of chicken is noticeably smaller, perhaps 25% smaller. Where’s the hedonic price adjustment in the BLS statistics for that? A friend of mine notes that the filet from his favorite steak house is now seven ounces instead of eight. But the steak is still the same price. Maybe portion control will finally get America to go on a diet.

The first comes from Karl N. and he says…

Charles, First you have to buy into the assumption that fuel prices are realistic and will continue to increase! In reality, there is no reason for them to be where they are.

Second, Ethanol requires no more energy to produce than gasoline. Producers must pump, refine, and transport gasoline. Global hunger increased before ethanol because the American farmers cannot cost effectively operate. Fertilizer, fuel, seed, transport costs, living expenses, land and machinery have all increased substantially since the 1960’s without a significant increase in grain prices. The market will have more grain with the increased production of Ethanol than without it.

Please do not buy into propaganda that Ethanol is not efficient to produce, will contribute to world hunger or will drive food prices up (a loaf of bread uses 4-5 cents of wheat in it).
The truth is that unless grain prices increase more farmers will be forced to quit and food supplies will decrease.

I have to say Karl, that fuel prices are realistic even at today’s price. Granted, a lot of speculation has helped take prices higher. But the truth is that according to the Energy Information Administration, the world’s oil production peaked in 2005.

Sure, more oil is being found. But it’s not being found in easy-to-reach places. It’s all offshore, sands, and shale. Production from these areas should come online in time to replace lost production from older wells. The net result? Flat to slightly higher production in the next five to ten years.

Even with US consumption falling, consumption in China, Brazil and India is skyrocketing. The truth is, if these countries keep buying more and more, then oil isn’t too expensive.

Second, you have to admit that corn-based ethanol isn’t the most efficient way to make energy, right? The US Department of Energy says that corn-based ethanol produces a whopping (note the sarcasm) 26 percent more energy than required for production.

That’s god-awful.

Cellulosic ethanol, on the other hand, could produce up to 80 percent more energy than is required to produce it. That’s much better. But mass-scale production is also far off. (There are a few companies setting up pilot plants. But that’s all)

Now, I agree that global hunger isn’t all ethanol’s fault. I’d place the blame on the emerging economies like Brazil, Russia, India and China. But you have to admit, using farmland for fuel means there’s less farmland available for food. And if there’s less food being made, prices move higher.

In addition, corn-based ethanol was a big reason why corn jumped well over 100% after President Bush first announced the ethanol initiative. The effect is obvious – the ethanol hype is helping prices move higher. And this has been a boon to farmers.

Better yet, farmers are poised to make even more money in the years to come, mainly because of growing global demand for food.

I also received an e-mail from Sam L. that said…

As a seasoned investor I wouldn’t put one penny in green stocks, not now or for the near future. It is all hype and no action.

All hype and no action, Sam? How about geothermal producers that are taking off? Or solar producers which are making profits? Wind producers are doing well, and many high-tech battery manufacturers are on the cusp of inking huge, multi-million dollar revenue generating deals.

If you think investing in clean energy is a bad idea, just take a look at the Market Vectors Global Alternative Energy Fund (GEX) and you’ll see that the sector’s been clearly moving higher. And the PowerShares Global Clean Energy Portfolio (PBD) has been doing the same.

It seems to me that investing in green stocks is a great thing to do. What you want to do is avoid the companies that have no profits… the ones that are using very experimental technologies that haven’t been proven yet. These companies may do well in the future, but you take a huge risk by putting your money on them now.

That type of action can be profitable for the properly caffeinated in-and-out set. But you have to be psychologically built for it (and physically set up for it). For most of us, in contrast, the words of trend follower Ed Seykota ring true: “High frequency trading makes about as much sense as high frequency flying.”

That’s why Taipan focuses more on swing-trade type opportunities, where the goal is to carve out meaty chunks of a move over weeks (if not months) at a time. There’s more money in sailing with the wind, we’ve found, and less hassle in not being chained to a screen.

So what is it, exactly, that has the short-term trigger-pullers so excited? Believe it or not, it’s basically the chart below (and others like it in the financials).

As Taipan Daily covered on Friday, there is a growing sense of hope that the worst has passed. The belief is that the Fed may be close to “done” slashing interest rates, and that after this week’s meeting, all things credit-related will start looking up. This belief has pushed up financials (and pushed down safe-haven assets like precious metals).

Growing Wheat in the Desert

Let’s be honest here, shall we? Your humble editor suggests that the “all clear” whistle is being blown by idiots. Now, “idiots” is undoubtedly a strong word. But it’s a tame word in comparison to some that come to mind upon hearing from the likes of James Oelschlager, a money manager based in Akron, Ohio.

According to Barron’s, Mr. Oelschlager runs $1.5 billion in assets. How he ever amassed that sum, one is hard-pressed to say. This is the opinion Mr. Oelschlager expressed on the current market environment: “Stagflation won’t happen . Money [supply] is under control. Valuations look cheap. Lousy sentiment is always bullish. Wheat will grow in the desert when man’s imagination fertilizes the soil.”

Madre de Dios! If you are bullish on the banks and brokers here, you should quake in fear knowing that this man is on your side of the ledger. Let’s break down that treasure trove of nuttiness shall we?

Stagflation won’t happen. Except for the fact, sir, that it is already happening to tens of millions of Americans.

Money [supply] is under control. On which planet, exactly? Alpha Centauri?

Valuations look cheap. Valuations of what? This is about as helpful as saying “restaurant menus look cheap.” There’s a difference between Smith & Wollensky’s and Joe Bob’s Chicken Shack.

Lousy sentiment is always bullish. Two pips for honesty here. at least you’re revealing your true colors.

Wheat will grow in the desert when man’s imagination fertilizes the soil. Ah, what a quote. What. a. quote. This one is, how might one put it, a “humdinger.”

Grade-A Fertilizer

As a Barron’s-anointed standard bearer of the bulls — in the midst of a full-blown food crisis no less — Mr. Oelschlager has made his case akin to that of growing wheat in the desert. The mind boggles.

No lack of touch with reality here, hey? For cynics like yours truly, this is manna from the Gods. Stocks will go up and up and up, as certainly as man’s cheery attitude can make crops take root in sand. could there be a better example of stupidly wishful thinking? Even Norman Vincent Peale would turn away in shame.

And speaking of “man’s imagination fertilizing the soil”. Mr. Oelschlager’s imagination is certainly being fertilized by something potent. Whatever it is, he should bag it up and sell it in the gardening section of Lowe’s or Home Depot — if not to farmers across the globe.

Our lovable Barron’s buffoon also grounds his optimism in belief that the price of oil will fall back to $75 soon. (Never mind the fact that the only way crude oil falls hard is if equities fall even harder.) But enough about him. Bullish goofballs willing to rave about wheat in the desert are probably more the exception than the rule. The broader point is, they are out there. and it doesn’t take many of them to bid up a market on the slightest ray of hope. And some of them are running billions of dollars.

“Farmers and food executives appealed fruitlessly to federal officials yesterday for regulatory steps to limit speculative buying that is helping to drive food prices higher,” according to the Washington Times.

In other words, the Commodity Futures Trading Commission is coming under pressure to “do something.”

While farmers here and abroad generally are benefiting from the high prices, even they have been burned by a tidal wave of investors and speculators pouring into the futures markets for corn, wheat, rice and other commodities and who are driving up prices in a way that makes it difficult for farmers to run their businesses.

“Something is wrong,” said National Farmers Union President Tom Buis, adding that the CFTC’s refusal to rein in speculators will force farmers and consumers to take their case to Congress.

“It may warrant congressional intervention,” he said. “The public is all too aware of the recent credit crisis on Wall Street. We don’t want a lack of oversight and regulation to lead to a similar crisis in rural America.”

In other words, if the CFTC doesn’t “do something,” Congresscritters will. And the CFTC seems disinclined to act.
Regulators said high prices are mostly the result of soaring world demand for grains combined with high fuel prices and drought-induced shortages in many countries…

“During such turbulent times, it is tempting to shoot first and ask questions later,” [CFTC Chairman Walter] Lukken said, but he contended the commission should be “cautious” about doing anything to curb speculation. He and other regulators argued that speculators add volume and liquidity to the markets, which makes them operate more efficiently and helps farmers and other players.

Left unspoken at the hearing, at least judging by this account, is the role of the falling dollar, something even middling UN bureaucrats are able to recognize. Of course, it’s an impolitic time for members of the CFTC to bring up the devaluation of the dollar, given how the people responsible for it could end up being their new masters.

With staple foods racing to record high prices, the world’s poor are feeling the pinch of the global food crisis. But the effects are not limited to the third world. Costco stores in northern California are imposing limits on buying of oil, flour, and rice reported a recent article in the NY Sun.

Dan Denning says to keep an eye on dairy prices, “No one is mentioning cows, though. Cows eat grain. Grain is more expensive. Dairy prices are rising as a result. Dairy Australia reports that East Coast dairy farmers are trucking milk all the way across the Nullarbor to Western Australia. Western Australia exports 20 million litres of milk a year to Singapore and Malaysia. But with local demand growing so fast, the cows in WA just aren’t working hard enough to meet demand.

What do you think the embedded energy cost is in a litre of Australia milk that ends up in Singapore? You have the petrol to power the tractor that harvests the grain that feeds the cow who’s milk must be refrigerated as its trucked across the continent via internal combustion engine to be transported on a coal or oil powered ship in containers made of plastic (oil) to Singapore where a lorry driver with a refrigerated truck that runs on petrol takes it to a store whose lights and freezers are kept bright and cool by coal-fired power. All so you can have some milk with your cake in Singapore’s fabulous Changi airport as your carbon foot print grows to the size of Godzilla’s paws.”

As a result of the price hikes Egypt, Cambodia, India and Vietnam have restricted export restricted the export of rice.

The price of grains — corn, wheat, and rice — has been rising since 2005 under pressure from farmers who would rather plant crops for biofuels than for food, the lack of technological breakthroughs in crop yields, and drought and disease. The sharpest increase has been this year, with the price of Thai rice, a world benchmark, nearly doubling since January, to $760 per metric ton. Some analysts expect that price to reach $1,000 in the next three months

Read on at washintonpost.com.

Tom Dyson is bullish on agriculture.

“Grain markets are a little frothy right now, but the long-term argument is solid. If you’d like to invest in grains, PowerShares has a sugar, corn, soybean, and wheat ETF (DBA). In October, iPath created JJA, traded on the NYSE. It tracks corn, wheat, soybeans, sugar, coffee, cotton, and soybean oil. Elements has come out with an instrument that tracks the 20 commodities in the Rogers International Commodities Index (RJA). Finally, market Vectors has an ETF of agribusiness stocks (MOO).”

The report revealed that farmers expect to plant 18% more soybeans and 5.5% more wheat this year.

According to BusinessWeek, “soybeans for May delivery dropped 70 cents to $11.9725 a bushel on the Chicago Board of Trade, its lowest level in three months. Wheat fell to a two-month low, losing 60 cents to $9.29 a bushel on the CBOT.”

Corn prices rose, however, adding 9.25 cents to $5.6975 a bushel on the CBOT after the report revealed that farmers intend to to plant 8% less corn.

Another commodity set to rise is copper, at least according to top commodities fund manager Frank Holmes.

Frank expects copper – which has gained 400% in the past five years and now sells for $3.75 per pound – to hit $8 to $10 in the coming years.

To find out more, click here.