A Global Bet On Booming Soft Commodities

What’s behind this global trend? Blame the law of supply and demand. Demand for soft commodities is exploding across the planet. Twenty years ago, three out of four people on planet earth were living on a mere 1,600 calories a day. Today, two billion of these people are eating a lot more like us.

On the supply side, global inventories of soft commodities haven’t been this low since Richard Nixon was president. China has lost fertile land equivalent of about the size of Maine each and every year for the past decade. To feed its population adequately, it should be adding that amount. Australia is facing such water shortages that the government is on the verge of turning off irrigation to 50,000 farmers. Rice production has dropped more than 90% and cotton production has more than halved.

The global shift toward biofuels only exacerbates the problem. With corn-based ethanol the latest (government-subsidized) rage, demand for crops as biofuel is set to double by 2030. Today, one out of five bushels of corn produced in the United States is going toward ethanol. With half of Detroit’s cars set to run mixed fuels by 2012, ethanol demand is set to jump substantially. To meet its green goals, Europe will have to allocate 25% of arable land toward ethanol production.

The best way to profit from this big picture “megatrend” is through a relatively new fund called Market Vectors–Agribusiness ETF (MOO) — the first ETF to invest directly in agricultural companies. Tracking Germany’s DAX Agribusiness Index, MOO holds 37 companies that trade on 13 exchanges worldwide. Those companies cover several subsectors of the agriculture market, including Agriculture Chemicals; Agriproduct Operations; Agricultural Equipment; Livestock Operations; and Ethanol/Biodiesel. Although U.S.-based companies dominate the index with a 59.9% weighting, most of them are multinationals that derive a significant portion of their revenues and profit from overseas markets. The next-largest country represented in the index is Canada, with 9.3%; followed by Singapore, 6.9%; Japan, 6.7%; and Norway, 5.2%. The ETFs top five holdings include: Mosaic (MOS), 9.6%; Monsanto (MON), 8.6%; Potash (POT), 8.2%; Japan’s Komatsu, 7.3%; and Deere (DE), 7.3%.

Here’s another thing I like about this ETF: It’s correlation with the S&P 500 is only .61. That means that it is one of the best ways around to diversify your portfolio.

So buy the Market Vectors–Agribusiness ETF (MOO) at market today, and place your stop at $45.00. For those of you who want to play the options, I recommend May $60 calls (MOOEH.X).

PORTFOLIO UPDATE

With the S&P 500 down 4.52% last week, the NASDAQ down 6.35%, and global stocks selling off sharply on Friday, it was a particularly tough week for markets across the board. More than ever, it is important for you to understand how much you are risking per position. If you are feeling uneasy about the market, you may consider reducing your average position size per trade, as well as reducing the size of the positions you take in any recommended option positions.

If you glance across the holdings in the Global Bull Market Alert portfolio, you’ll notice a couple of emerging trends. First, you’re concentrated in the countries and sectors that have exhibited the strongest relative strength. That’s why you have such an unusually high weighting in Russia and telecoms. Second, you’ll notice a shift toward more picks that are less correlated to the overall stock market. This week’s pick, as well as your double short position in China through UltraShort FTSE/Xinhua China 25 Proshare (FXP), are both examples of how the portfolio is being repositioned in this manner. In coming weeks, look for more commodity and currency plays that will continue moving the portfolio in this direction.

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