If you were to flip on the TV today and tune into your favorite financial news network, you would swear that the hottest commodity markets are the energies and the Dollar. I tend to disagree. In fact, I believe that the hottest markets for 2006 will be Sugar and Corn. Yes, Sugar and Corn. Furthermore, these markets will continue to be some of the hottest and most economically important plays that you can make in your portfolio in the next 10-15 years. Why, you ask? Look no further than the keys in your pocket.
Over the past few years, ethanol and other alternative fuel sources have been given more attention as likely fuel sources for the future. The ecological and long term economic viability of these products is undeniable, and the Big 6 is starting to take notice and act rapidly to employ these new fuel sources. First, a primer on ethanol fuel, since I believe it will be a strong and critical driver of corn and sugar futures going forward. According to Ethanol.com, "Ethanol is a clean-burning, high-octane fuel that is produced from renewable sources. At its most basic, ethanol is grain alcohol, produced from crops such as corn. Because it is domestically produced, ethanol helps reduce America's dependence upon foreign sources of energy." Sounds simple enough, and it is.
Most misconceptions of ethanol come from actual use of the product. Ethanol is not a total fuel replacement more than it is an additive to fuels in common use today. Ethonol.com tells us that "Any amount of ethanol can be combined with gasoline, but the most common blends are:
E10 - 10% ethanol and 90% unleaded gasoline E10 is approved for use in any make or model of vehicle sold in the U.S. Many automakers recommend its use because of its high performance, clean-burning characteristics. In 2004, about one-third of America's gasoline was blended with ethanol, most in this 10% variety.
E85 - 85% ethanol and 15% unleaded gasoline E85 is an alternative fuel for use in flexible fuel vehicles (FFVs). When E85 is not available, these FFVs can operate on straight gasoline or any ethanol blend up to 85%.
Now, I hope you are sitting down because I am about to teach you an important lesson. It does not take a special vehicle to run on ethanol enhanced fuels. In fact, all vehicles can use E10 with no modifications to the engine! This is wonderful news to the environmentally conscious investors out there.
Ethanol's impact on the markets
The immediate impact of using alternative fuel sources can be seen RIGHT NOW in the sugar market. Brazil is currently the world's largest producer of Ethanol, and also has one of the largest stockpiles of Sugarcane, which they use to produce the fuel. Lets take a look at the chart of Sugar over the past 9 months:
Now, I hope you are sitting down because I am about to teach you an important lesson. It does not take a special vehicle to run on ethanol enhanced fuels. In fact, all vehicles can use E10 with no modifications to the engine! This is wonderful news to the environmentally conscious investors out there.
Ethanol's impact on the markets
The immediate impact of using alternative fuel sources can be seen RIGHT NOW in the sugar market. Brazil is currently the world's largest producer of Ethanol, and also has one of the largest stockpiles of Sugarcane, which they use to produce the fuel. Lets take a look at the chart of Sugar over the past 9 months:
Now, I hope you are sitting down because I am about to teach you an important lesson. It does not take a special vehicle to run on ethanol enhanced fuels. In fact, all vehicles can use E10 with no modifications to the engine! This is wonderful news to the environmentally conscious investors out there.
Ethanol's impact on the markets
The immediate impact of using alternative fuel sources can be seen RIGHT NOW in the sugar market. Brazil is currently the world's largest producer of Ethanol, and also has one of the largest stockpiles of Sugarcane, which they use to produce the fuel. Lets take a look at the chart of Sugar over the past 9 months:
Now, I hope you are sitting down because I am about to teach you an important lesson. It does not take a special vehicle to run on ethanol enhanced fuels. In fact, all vehicles can use E10 with no modifications to the engine! This is wonderful news to the environmentally conscious investors out there.
Ethanol's impact on the markets
The immediate impact of using alternative fuel sources can be seen RIGHT NOW in the sugar market. Brazil is currently the world's largest producer of Ethanol, and also has one of the largest stockpiles of Sugarcane, which they use to produce the fuel. Lets take a look at the chart of Sugar over the past 9 months:
As you can immediately see, this contract has had record pushes to the upside, blowing through it's 80 day moving average on the way to a high of over 18.75. Sitting over 15 year highs, technically, this trend can extend well beyond its current 18.75 high, with possible pushes to 20.00 plus! Fueling (no pun intended) this most recent move is the news out of Iran regarding its nuclear program, as well as temporary interruptions in the crude supply world-wide. Also, as I have been saying time after time on my blog (tradingsystems.blogspot.com), China and India have economies that are growing well beyond the pace that most analysts expected. With China now being the worlds 6th largest economy and pacing itself for another year of double digit growth, their demands for world commodities like Sugar and Crude will skyrocket. With recent slips in Brazilian exports, the laws of supply and demand rule, taking Sugar to its new highs.
Corn, on the other hand, has been a laggard in the market, perhaps providing a great opportunity for investors. With record surpluses literally sitting dormant in silos across the US, the impact of the fundamental news has not hit that product as actively for 2006. The U.S. monthly ethanol production report from the DOE revealed a record national daily output of 261,000 barrels in September for a 2nd month a row. With this year's passage of a national energy policy that encourages renewable fuels, the U.S. ethanol industry is pushing strongly. Nearly 350 million gallons of new capacity has already come on-line since the beginning of this crop year in September with an additional 800-850 million gal. of capacity currently under construction according to the Renewable Fuels Association that normally would be operating by September 1, 2006. This 25-30% jump in the U.S. ethanol plant capacity should provide a substantial boast in corn's industrial usage this year. Currently, the USDA is forecasting a 19% increase in corn's 2005/06 ethanol demand at 1.575 billion bu., but this level could be 50-65 million bu. too low if world oil prices remain high. Corn has not yet attracted the fury of Sugar, but is as useful a fuel source, and much more abundant here in the US. Take a look at the large divergence in the markets over the past 9 months:
From looking at this chart, and the potential impact of alternative fuel sources, Corn is sitting in an oversold position. Possible factors to get Corn moving include moves above the recent 220 highs, more fundamental news about Iran, Iraq, etc., Crude moving over $70 pb. and a tougher than normal farming season in 2006.
How can I take advantage of the markets?
In fast market situations like Sugar, Corn and many of the world commodities, diversification is king. For example, take a look at the huge range in the Sugar markets today. If you were investing in just that contract, you would have seen a $1624 range per contract. For most traders, that type of intra-day volatility is best balanced using a portfolio that contains markets in addition to Sugar. Furthermore, assuming that there will be periods of profit taking in these markets, you need a fund that has the ability to provide returns if the market moves up or down. I have found that the best way to invest in these markets is through the use of managed futures. If you are interested in making money in Sugar, Corn and other global markets that will be impacted by the worlds demand for alternative fuel sources and the growth in China and India, contact me and I we can discuss methods for diversification that are currently offered.
