How to make Money from Higher Food Prices

I am sure like me, that you have noticed the increased prices of many food stuffs when you make your trips to the local store or supermarket.Global food scarcity is even in this day and age still a major problem.Countries such as Egypt have actually widened its food rationing system for the first time in 20 years.Russia and China are putting controls in place and other countries such as Vietnam are imposing taxes on foreign sales to protect their own supplies.

The cause of all this is that our current Global food supplies cannot cope with the increasing demands of a world population which is growing by over 70 million per annum.Not only is that a huge increase but the emerging market countries with their expanding middle classes are starting to demand Westernised , meat heavy diets.We are also seeing misguided political pressure to increase the use of Biofuels-this has the effect of diverting already stretched supplies of foodstuffs such as grains to energy inefficient fuels.

This means that over the last year while the price of agricultural commodities have gone through the roof look at the price of wheat over the same period.

Last week the price of wheat rose 25% in one day as Kazakhstan (one of the largest exporters of grain) announced a plan to impose export tariffs.This caused buyers to panic sending the price soaring.So we all pile into grains then?...well not exactly I am always wary when something moves this much so quickly and I think we are experiencing a short term bubble in the price of grains.

For me a better way to take advantage of the grains boom and one which is not so obvious-and therefore less likely to be driven up by the hype is through buying meat such as Live Cattle and Hogs.Normally this would only

be possible on the CME futures but once again the advent of ETF's or in this case ETC(Exchange Traded Commodities) come to our rescue.

They can be traded in London via ETF Securities the symbols are( LSE:HOGS) and (LSE:CATL). This will give in my opinion good exposure to the grains boom-how I hear you ask, well Livestock are fed mainly on grains so if you are a livestock farmer faced with the choice of paying the increased costs of feeding your herd or selling them in the market-it seems to be a pretty easy choice.The farmers rather than feed their livestock grain will sell it into the market and obtain record prices, they will then also sell the livestock.

If you look at the prices of cattle for the last 12 months you will see that cattle has dropped in price as a result of too much stock hitting the markets

This will mean in the near term we have too much grains everyone is planting that to cash in on the high prices and not enough meat, within the next 6-12 mths people are going to start to realise that there is a shortage of meat and this will I believe cause prices to rise. Supply and demand, Supply and demand the mantra on which the commodity markets thrive.

I would be looking for opportunities to cash in on the grains and buy the meats.If you feel really aggressive then think of going short the grains and long the meats....how can I do that in a non margin account I hear you ask...........well that is for the next post. Until then good trading.

Alan

Reference List

href="http://traderbill.wordpress.com/2008/03/03/3308a-mess-and-a-half/" rel="nofollow">3/3/08…a mess and a half « Traderbill’s Financial Markets..

Bull Market in Agriculture | Teach Talk Trade Day Trading & Technical Analy..

The value of the U.S. dollar is sinking world-wide. « Bridges to Hope..

Wheat’s Major Price Reversal : Contrarian Profits

Data Feed « Trading for the Masses

Now That Warren Buffett is Crazy About the Loonie, Here are Seven Ways to P..

Tracey’s Market Update : Blog Archive : Wheat: “A rally of e..

Putting the pieces together...: Commodity/Inflation Funds: Update

A short Guide to Hedging

As promised here is some background and insight around hedging-incidentally as I surmised the markets took a turn down yesterday and the QQQQ Puts I bought have already increased by just under 20% in one day.I cannot say if this is the beginning of a correction but I am glad I have some downside protection.Hedging is a little discussed but very important tool for investors.It may sound like an outdoor activity involving shears and ladders but it can be the difference between poor and great returns


What Is Hedging?
The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.

Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another.

Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.

Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can't help us escape that hard reality of the risk-return tradeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.

How Do Investors Hedge?
For the most part, hedging techniques involve using complicated financial instruments known as derivatives, the two most common of which are options and futures. We're not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.

How does this work in Practice
Say you have bought shares in Google(Goog) you believe that they are a good long term bet but you want to protect yourself from any potential downside in the short term.You would buy a number of PUT options in Google to protect you should they fall below a certain price-say $450.
Every put option is worth 100 shares so if you owned 200 shares you would need to buy 2 PUT options.If the share price fell below the $450 then your PUT options would increase in value to protect and minimise the losses.(This is a reasonably simplistic explanation as there are a no of other factors at play here but this is the general principle behind using Options to Hedge)
Keep in mind that because there are so many different types of options and futures contracts an investor can hedge against nearly anything, whether a stock, commodity price, interest rate, or currency.

The Downside
Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isn't to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.

We've been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isn't a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.

What Hedging Means to You
The majority of investors will never trade a derivative contract in their life. In fact most buy-and-hold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because they let their investments grow with the overall market.

So why learn about hedging?

Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.

Conclusion
Because risk is an essential yet precarious element of investing, you should, regardless of what kind of investor you are, gain a fairly good awareness of how investors and companies work to protect themselves. Whether or not you decide to start practicing these intricate uses of derivatives, learning about how hedging works will help advance your understanding the market, which will always help you be a better investor.


Best Wishes

RT

Go East Young Man-Made in Taiwan and the China Syndrome Part 1

The US Markets are closed today so I thought this might be an opportunity to look beyond the US shores to another favourite market of mine-the Far East.For many years the Asian Markets have lagged far behind the US and Europe.I think we may be seeing the tentative shoots of recovery in certain markets.Japan is still a wildcard but I believe that 2007 may prove to be a good year for Taiwan. In 2006 a number of emerging mkts including some in Asia have hit all time highs but Taiwan still lags and is over 43% below its high from Feb 1990.Taiwan is home to some of the largest Tech and Electronics companies in the World. Companies that produce I-Pods and the Mini Mac as well as supply major IT companies such as Dell and Hewlett Packard-the link therefore to PC and Semi-conductors is inextricable-when these markets boom so does the Taiwanese economy.If you believe that these sectors are likely to start to move in 2007-(think Vista and PC's) then Taiwan is a good place to invest.For me the best way to play this is via the iShares MSCI Taiwan Index Fund(EWT-NYSE).This fund is broadly based and diversified but heavily weighted to Technology Companies. Another boost for Taiwan is that it is one of the major trading partners of China. The Chinese economy is still one of the fastest growing economies in the world and as the mass Chinese become more affluent then they will increase their expenditure on goods such as PC's and Technology-this can only be good for the Taiwanese economy and for the iShares MSCI Taiwan Index Fund(EWT-NYSE).I will be opening a position in this fund at the mkt tomorrow.I will also post Part 2 of this communication looking in a bit more detail at opportunities to gain some exposure to China such as Hong Kong Shanghai Bank (HBC) , Templeton Dragon Fund (TDF-NYSE) and China Medical Technologies (CMED-NYSE).



Best wishes for the New Year and Good Trading

RT