By Kevin Kerr –
NORWALK, Conn. (MarketWatch) — Farmers in Indiana are surveying their crops in disgust. No “knee high by July” corn here. In fact, most of it’s about half the size of an average ear at this time last year.
All of it’s due to the drought, and little relief seems to be on the way. Soon it may be too late for the crop this year to survive. But the time may be ripe for traders wishing to take advantage of the coming squeeze on corn.
Corn is the one crop that needs water relentlessly. Without it, the crop is lost. What this means for smart commodity investors is a way to capitalize on the corn market moving much higher by buying call options on corn futures for December. Corn margins are very low, so it’s accessible to almost any level of trader — and no crop stands to gain as much form a long dry summer than corn.
The relentless drought in the Midwest indicates that a widespread crop loss is inevitable, not just for corn but beans and wheat as well. The problems don’t end there however. The dry conditions are also prompting concern in urban areas where rivers and streams are almost dried up. Homeowners there face stiff fines for watering plants or sprinkling their brown lawns with much needed water.
The hardest hit areas stretch from eastern Texas all the way north into the Great Lakes region, affecting Indiana, Arkansas, Iowa, Wisconsin, and Michigan, Missouri and Illinois.
In the Chicago for example, they’ve seen a mere 12 inches of rain since the beginning of 2005. That’s only about half of the normal amount according to weather analysts reports.
Even worse, July is delivering only about 0.7 inches so far in a month that typically gets 3.5 inches. The situation is turning desperate and is providing good buying opportunities here at these levels.
Remember your first time?
For first time investors who are excited about the boom market in commodities, grains are presenting a good opportunity to get started.
But first, trading commodities is just like anything else. You have to learn somewhat from experience, through trial and error. (Hopefully, not too much error.) It’s important to enlist the help of a good financial adviser or advisory service.
There are also many good books for the investor who is just starting out. Hot Commodities, for example, by legendary resource trader Jim Rogers is a good book for the first time commodity investor.
The most important thing a new commodity investor needs to do is to pick the right markets to trade in the beginning. The energy markets we will put at the opposite end of the spectrum, all the way to the way right let’s say.
Now where we are going to begin is way over on the left, focusing on a market more suited to learning since it has somewhat consistent patterns, much lower margins, and is usually limited in the amount it moves within a day.
The markets I am talking about are the grain markets.
Trading vs. trading smart
There’s trading and then there’s trading smart. Many people don’t know the difference.
Many first time commodity investors jump right to the biggest, most volatile market and do so on a recommendation, hunch, tip or some other mystical power. Needless to say, this doesn’t usually work out.
Often individuals get in over their heads in markets like crude oil. Shocked by price movements and margin calls, they get forced out almost immediately.
For the first time, it’s often best not to go right into the most volatile and expensive market just because it’s exciting and everyone is talking about it. In fact, that’s a good reason to avoid it like the plague.
Why are the grains better? Well first of all they have much lower margins, which is the money you need to put up front to even enter into the position.
For example: The approximate initial margin for crude oil is around $4,000, the initial margin for Corn is $506. Clearly corn is a lot more palatable for first time investors. In addition, corn rarely moves in such extreme ranges as crude oil and often follows clear seasonal or weather related patterns. This makes it a great market to learn the basics of commodity trading without too much pain in the process.
Slow and steady wins the race
The grain markets offer excitement and volatility but at a measured pace. Corn, wheat and beans are all liquid markets with easy to follow fundamentals, a wide choice of options and as I said earlier low, low margins.
In the world of commodities victory doesn’t always go to the swift it goes to those who can see opportunities and value where others can’t or don’t. The grain markets and the tropical or “softs” market are offering just such opportunities to the savvy resource investor and will for some time to come.