NEARBY KC HARD RED WINTER WHEAT: It Really Has Been Amazing, Hasn’t It?:

The rush higher began right at the seasonal turning point…June 15th… when the harvest for hard and soft red winter wheat has historically ended, but this is nothing short of stunning…..  and it has caught even the best professionals and grain trading exports off guard.’

“The only market that counts these days is the grain market for grains have leapt to the centre stage everywhere as news of the Russian-Ukrainian- Kazakhstani agriculture problems spreads like proverbial wild fire. Having traded to the limit up yesterday for a short while, and having accumulated pools for a short while, wheat quietly closed at the limit. It is trading materially higher this morning as those who’ve contracted wheat out of Russia for sales abroad now find themselves in a most uncomfortable position. They’ve sold grain they now do not have.
They had it once; they’ve become short of instead.” – Dennis Gartman

Drought Forces Russia to Ban Grain Exports

Russia yesterday (Thursday) banned grain exports after unrelenting heat left the country with its worst drought in at least a half-century.

Wheat rose to a 23-month high after Russia, the world’s third-largest grower, announced a ban beginning Aug.15 that will last through the end of the year. Corn and rice prices also surged yesterday after Russian Prime Minister Vladimir Putin said a ban on those grains would be “appropriate” in light of skyrocketing prices. 

Domestic grain prices gained 19% last week, faster than at the peak of the global food crisis in 2008.  The ban includes wheat, barley, rye, corn and flour exports, according to the government decree that also set aside nearly $1.2 billion for stricken farmers…..read more HERE

Fields of Dreams

Imagine yourself standing in fields of soy and sugar cane that carpet the land out to the horizon as far as you can see and sweeping blue skies overhead. Only an occasional tree or silo gives you any sense of distance.

You are standing on a vast savannah that is one of the most productive farming regions in Brazil. Called the cerrado, it produces 54% of Brazil’s soybeans, 28% of its corn and 59% of its coffee. It also supports 55% of Brazil’s beef industry.

It’s an immense area – about 200 million hectares (or 494 million acres) – with about half of the land still available to convert to producing farmland or to support livestock. This has been, and remains, a kind of frontier of world agriculture. When you look at the amount of new arable land cultivated in the past 30 years, much of it has come from right here.

Though Brazil didn’t win its sixth World Cup, the country is in a good spot. It has a few things the world will really need over the next couple of decades as the global population rises by more than 70 million people a year. It has land, water and plenty of sunshine. Good for growing things.

I’ve been thinking about Brazil more and more as I study what’s going on in the world’s agricultural markets. More and more, I come to the conclusion that Brazil will have a big hand to play. For investors, there will be a variety of opportunities. Some of these won’t be obvious from afar.

For instance, not all land in the cerrado is equally attractive. There is a big factor to consider: How easily can you get what you grow to market? For most of Brazil, the answer is “not easily.”

In Mato Grosso, the land is flat and there is plenty of rainfall. A farmer can enjoy three harvests a year, usually rotating between soy, corn and cotton. The land is also cheap there, which is what attracts me. But there is a big problem: The roads to the river port are in poor condition. The Economist recently reported that farmers here spend 38% of their revenues just to get their produce from the farm to the docks. Even then, some ports are just inadequate to the task and ships queue up as far as the eye can see, waiting to load.

(This is what made me think of Peter Fleming’s comment, “A man in a hurry will be miserable in Brazil,” which I quoted in yesterday’s issue. Brazil is not a place where things happen quickly. By some estimates, Brazil needs to double its investment in infrastructure to keep up with growth. That will be an opportunity in itself.)

Yet wander further south to Mato Grosso do Sul. Head to Campo Grande (which means “Great Field.”) This is the capital of the state. Here you will find an existing rail line to São Paulo. A new ethanol pipeline is in the works that will also link Campo Grande with São Paulo. There is a new rail link under development, too, that will link Campo Grande with the port at Paranagua.

So infrastructure here is better than in some of the other inland areas, and it is improving. The land here, though, is still cheap. In part, that’s because the soil is very old and is low in nutrients needed to become productive farmland. But that creates a wonderful opportunity.

An investor today can buy the raw land for around $2,500-3,000 per hectare. Then, over a three-four year period, you could remediate the land by adding lime and fertilizers and planting restorative crops such as soy. This is a straightforward and proven process and largely self-funding.

At the end of the period, you’ve got good productive land worth at least double what you paid for it. The market values farmland based on how much it produces. How many sacks of soy, for example, does it produce per hectare? The better they yield, the higher the price.

That’s the idea behind a new fund forming to take advantage of the situation. It is targeting 45 sacks per hectare, which would fetch $6,300 per hectare. After management fees, the investor would earn an estimated 27% annual return, on his way to doubling his money.

Of course, an investor could do a lot better if soy prices were higher. Also, the impact of the new infrastructure will likely raise the price of land, too. It’s a good situation.

I plan to visit Brazil in September to get a firsthand look at the cerrado and Campo Grande. You are invited to come along. We’ll meet with Rob Hill, the director of the fund I mentioned above, and you’ll have the opportunity to invest if you choose. (The minimum investment is now $100,000.) He’s a good guy and knows the agricultural story in Brazil better than anyone I’ve ever met. I’m sure we’ll get all kinds of good intelligence from Rob.

Also, we’ll meet with Helio Netto, from Sotheby’s International Realty, who specializes in Brazilian farms and agribusiness. Alan Marks, a professor of economics at the University of Campo Grande, will give us context. These are just a few of the folks we’ll meet.

We’ll also spend some time in São Paulo. And if you’d like, when the business part of the trip is over, we’ll head out to Rio de Janeiro to relax and enjoy a bit of Brazil. It should be a good and very educational trip.

Call Barb Perriello for more information on the trip at (800) 926-6575, extension 104, or send an e-mail to barb@opportunity-travel.com. The dates are Sept. 19-25. I hope you can join me.

In the meantime, I continue to seek out good investments in agriculture (both in and out of the stock market), which I think will be a good business to be in for many years to come. I also have been keeping a watch list of Brazilian stocks and stocks that should benefit from the transformation happening in Brazil. I’ll share some of the more interesting ones with you in a future letter. Stay tuned…

Chris Mayer
for The Daily Reckoning

Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris has been quoted over a dozen times by MarketWatch, and has spoken on Forbes on Fox. He has also spoken on CNN Radio, and has made multiple CNBC appearances. Chris is the editor of Capital and Crisis and Mayer’s Special Situations, a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks. In 2008, Chris authored Invest Like a Dealmaker: Secrets From a Former Banking Insider.

August, the eighth month of the year, is the last month before the traditional harvest time in the Northern Hemisphere. Thus, the old saying was “If the 24th of August be fair and clear, then hope for a prosperous Autumn that year.”

So far, the month of August has been very fair and clear for the stock market…and for the commodities markets. These buoyant trading days of early August continue last month’s bullish action in both the stock and commodities markets.

But as we approach the harvest season, my thoughts turn first to the rumblings in the grain pits. Agricultural commodities have been rallying strongly for several weeks. All the farm goodies enjoyed a nice jump after falling fairly sharply during the early part of this year.

These strong agricultural prices have been helpful for most of the “ag-focused” stocks I have recommended to the subscribers of Mayer’s Special Situations. The ag plays I favor focus primarily on fertilizers or irrigation equipment.

Sugar, is another agricultural product worth paying attention to. I think we’re in good position for another big sugar rally. I’ve been doing a lot of work on Brazil lately, in preparation for my upcoming trip there. And while I knew Brazilian infrastructure was poor, my research really hammers home to me just how bad it is. What does this have to do with the price of sugar?

Well, Brazil is a big sugar producer. Apparently, there are 122 ships sitting around in Brazilian ports waiting to load sugar for export. Some trucks are waiting as long as 40 hours to unload their cargo on these ships. What a mess! It makes me think of what Peter Fleming wrote in Brazilian Adventure, “A man in a hurry will be miserable in Brazil.” You need a lot of patience to operate in this market.

Heavy rains have something to do with it. Ports have stopped loading, to try to minimize water damage. In any case, the sugar coming out of Brazil may be less than normal. I listened in to comments by Cosan’s CEO (Cosan is a big Brazilian sugar refinery) and he thought there would be less sugar produced this year than the year before.

Another factor to add into this: India’s monsoon season had about 16% less rain than normal for June. India is a big producer and consumer of sugar. This is not a good sign for the sugar crop there.

Inventories of sugar are already pretty low. F.O. Licht, a firm with a 130-year history in commodities, reported that the Philippines, India, Pakistan and Indonesia are “virtually out” of sugar reserves.

No surprise, then, that speculators are loading up on sugar again

A recovery in sugar prices would likely aid stocks like Imperial Sugar (NASDAQ:IPSU), which took a beating in its last quarterly report as sugar took a big dip. In coming quarters, this may well reverse.

By the way, the performance of coal is worth noting. We’ve talked about China’s voracious appetite for coal, in particular the metallurgical coal, used in making steel. It can’t make enough to satisfy its own demand.

This next chart makes that really clear:

China has a yawning gap in met coal, and those blue bars on the chart show you how much it’s had to import. This is likely a long-term and permanent gap. So I expect there will be good opportunities in supplying China with met coal in the years ahead.

One other interesting note in this admittedly brief and haphazard commodity survey: Palladium may be giving off a clue. Over the weekend, I read an interesting letter by John Clemmow at UBS, who put forward a novel idea about the relationship between palladium and gold.

Palladium is an important industrial metal. Lately, it’s become more exciting, because it is the key metal used in diesel engines. These engines are selling strong because of demand from emerging markets – a trend expected to continue for years. Along with this, Russia is, apparently, close to exhausting its stockpiles of the metal. But no one knows for sure, as such stockpiles are state secrets.

In any case, palladium is a market that appears to be in surplus. This is a trend that doesn’t seem likely to end anytime real soon. Mine supply is not likely to decline. If anything, it will rise. Plus, there is a lot of palladium in stock.

Yet palladium rose recently to $488 per ounce, the highest price since June 23. This is in sharp contrast to the gold price, which is down. Clemmow notes, “Gold…can be many things, but as I’ve pointed out before, [it] only massively outperforms in a climate of fear. Palladium is – to me – the ultimate risk on metal trade. If it is going up, then so should the price of other risk assets.”

Clemmow finds that a palladium-gold ratio tracks the stock market closely. “The news that palladium is rising while gold is falling is just another signal that risk is coming back to the market.” Here is his chart:

As I say, it’s a rather novel indicator, another measure of fear or lack thereof. Right now, it shows fear receding and risk assets rising. Clemmow’s indicator says stocks are headed higher. We’ll see.

In the meantime, there are many curious wrinkles in the commodity markets these days and lots of opportunity. It’s a great unfolding drama with never-ending twists and turns. Forced to hazard a guess today, I’d bet August is very sweet for sugar and that agricultural commodities in general continue to lead the pack.

Chris Mayer
for The Daily Reckoning

Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris has been quoted over a dozen times by MarketWatch, and has spoken on Forbes on Fox. He has also spoken on CNN Radio, and has made multiple CNBC appearances. Chris is the editor of Capital and Crisis and Mayer’s Special Situations, a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks. In 2008, Chris authored Invest Like a Dealmaker: Secrets From a Former Banking Insider.