Day Trading Pro

It sure seems to me that I am paying more at the supermarket these days. So I made the mistake of comparing my food bills from just a few months ago with my supermarket charges from this month. Yup - I paid about 5% more this month overall, but a LOT more for basics like milk, eggs, and beef.

They say the rise in food prices worldwide is the result of a “perfect storm” of economic conditions. Bad weather in huge sections of the world caused below-average harvests for the past two years. Droughts, hurricanes, and floods have brought food reserves to ever lower levels.

Record high oil prices have also played a big role. The price of oil is directly linked to the price of the fertilizer used to increase harvests, and to the cost of transporting food commodities around the world. If you don’t think that affects you, look at the little stickers on your fruit next time you’re shopping. This week my oranges came from Morocco, the kiwi from Italy (Hey, New Zealand - what’s up with that?), and my pears came from Chile.

And the price of oil has also increased the demand for ethanol as a fuel alternative. The more ethanol we produce the less corn, sugar, and soybeans end up in our food supply. Fed Chairman Bernanke said recently that a “significant portion” of the corn crop is being diverted to ethanol.

Another major player in our perfect storm is growing demand for food from the developing world. Countries like China and India have an exploding middle class with an appetite for food, and the pocketbook for afford it.

So I got to thinking - is there an opportunity here? I looked around for investments that will leverage the new, higher food prices. One of the major agriculture exchange-traded-funds caught my eye: PowerShares DB Agriculture (AMEX:DBA). This fund, started in January 2007, has about $2.4 billion in assets. Its holdings are primarily soybean, sugar, corn, and wheat futures. It has a 1-year total return of 48.16%. It peaked in March of this year around $43. Since then, it has pulled back and shown a triple-bottom reversal pattern with support at $36.

I recently added DBA to my long-term portfolio at $36.52. My target is $45-$50 within the next 6 months. Another way to play it would be to purchase the October 2008 calls with a $39 strike price (DBA JM).

Manny Backus
First Hour Trader

P.S. It’s these gloom and doom times, laden with huge trading swings and stunning volatility in the markets, that make for ideal trading opportunities. Join us for trading here.