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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


Agriculture ETF


The PowerShares DB Agriculture Fund (AMEX: DBA)

The PowerShares DB Agriculture Fund (AMEX: DBA), based on the Deutsche Bank Liquid Commodity Index -- Optimum Yield Agriculture Excess Return, is a new vehicle for anyone who wants to invest in agricultural commodities without opening a futures account. The Fund seeks to track the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return™

On 16th January 2007, a U.S government economist said the ethanol industry was going to use much more corn than everyone expected next year.  On Thursday, the USDA's crop report came out showing next year's grain crops would be much smaller than expected. The impact of this staement pushed Corn prices up by 15% in a week! It is now selling for more than $4 a bushel for the first time since 1996. Wheat and beans went way up on the news, too. Oats have jumped 9%. The conditions are ripe for a bull market in agriculture. 

For the first time in history, investors can buy American agriculture products through the stock market. PowerShares have just launched an agricultural ETF.  There does'nt seem to have been much publicity, and it has'nt registered yet on the radars of  the major brokerages. The new PowerShares fund tracks an agriculture index. The index is divided equally among wheat, corn, sugar, and soybeans. Deustche Bank runs it. They are a well respected Bank & have good track performance on many of their funds.

There are many reasons why these commodities should be selling at much higher prices:

1) Agriculture has been in a terrible bear market for so long that the public has lost interest in crop prices.
The prices for corn, wheat, oats, soybeans, cattle, and hogs have been stagnant for years.
But, recently they have started moving higher.

2) All those people who ever wanted to buy agriculture but weren't able to, can now simply buy an Exchange Traded Fund.

DBA rose 8.7% in its first six trading days. Then it paused and fell back 4%. We believe this agriculture bull market is just getting started. Now, we have a way to play it, without the hassle of having to open a futures account.

We think that we are about to see a huge reversal in crop fortunes. If we are correct,corn and wheat prices will shoot through the roof.  Hog and cattle farmers will make great profits.  Wheat prices just exceeded 2003 levels and are now making 10-year highs. Prices mid month hit their maximum allowed increase - a 7% one-day gain. Corn prices are up 50% in 12 months and are closing in on 10-year highs. Oat prices are up 17% in a little more than a month and are also about to hit 10-year highs. 

There are four elements driving this bull market.

1)This year’s crop looks bad, much worse than everyone had expected. You may have read about the horrendous droughts in Australia and Argentina, but did you know the U.S. crop is far worse than even the USDA predicts?  Corn yields have consistently been below last years’ numbers.  If this is a trend that continues,corn prices could be explosive in the next six months.

2)Inflation.  Farming is energy-intensive. Fertilizer and pesticide production is the most energy-intensive of all farm inputs Plus, you need petrol to run tractors and move your produce to market. As the price of inputs rises, so must the price of the final product.

3)Fuel or Food.  Anything that grows on a farm can be turned into fuel. Turning soybean oil into diesel and corn into ethanol are the big stories in the press right now, but any farm product will work.  Farms are even good places for wind turbines. As the price of energy rises, our mouths will compete with our cars for agricultural produce. Prices will rise.

4)Water.  Crops use about 75% of all water withdrawn from rivers, aquifers, and lakes. One-third of the world’s population is living in water-scarce areas.  When water and energy are scarce, demand will increase.  Inflation is rising. The result will be that Crop prices have to rise.

This bull market is in its infancy.  To date, access to these markets is difficult,  without playing the futures market. But with the introduction of this new ETF there is a simple way to get exposure to agriculture.

Buy the Deutsche Bank Agriculture ETF (DBA:AMEX)




Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.