Where These Two Commodity Investments Are Headed Next

Apologies for the short article today, folks. I’m feeling a bit under the weather, but I promised you more info on two commodity investments — the PowerShares DB Agriculture ETF (DBA:NYSE) and the iPath Dow Jones UBS Grains ETN (JJG:NYSE).

So let’s take a look at some figures…

JJG has performed well over the past year, with gains of nearly 60%. Unfortunately, those gains came in the second half of 2010. Year-to-date, JJG has only returned 2.22%.

Here’s what JJG holds:

Corn: 41.11%
Soybeans: 37.22%
Wheat: 21.66%

DBA is a bit different

DBA has climbed about 39% over the past year. But like JJG, most of that came in the second half of 2010. The beginning of 2011 has been rough so far. Here are the holdings for DBA currently:

View Larger Chart

Notice that most of the largest holdings — corn, soybeans, sugar and wheat (if you combine the last two listings) — have a long contract time. That first column tells you when the contracts DBA is holding will expire.

With the exception of live cattle, these major holdings expire at the end of the year, or in mid-2012.

That will give these commodity investments plenty of time to ride any supply shortages. And for corn in particular, the threat of short supplies is very real. The USDA cut corn’s production estimates for this year’s harvest from 13.505 billion bushels to 13.2 billion bushels.

Wet weather and flooding forced farmers to plant 1.478 million acres fewer than they were planning on.

And here’s something: China’s demand for soybeans is up a record 29% year-over-year, while the USDA lowered its estimate for production.

Wheat production is also on the chopping block. Canada says its planted acres will fall 13% because of rain, and the USDA also cut production estimates.

Now that we know the potential supply issues these grains are facing, let’s take a quick look at some charts.

This is JJG since 2010.

View Larger Chart

The blue lines are called Fibonacci Retracements. We talked about them here at Smart Investing Daily in this article. In a nutshell, these lines measure how much a stock has fallen from a peak. They can also be used to see how much a stock has climbed from a bottom.

These lines aren’t just arbitrary, though. They represent points where stocks tend to rebound. As you can see from this chart of JJG, the 38.2% line provided support back in mid-March.

(This line means JJG’s share prices have fallen 38.2% from the peak in early February.)

Right now, JJG’s shares are trading just at this level. If the line holds true, JJG could see another rebound, possibly to $55.

Of course, $55 has been a tough price for JJG to get above, so there’s a strong possibility that JJG will struggle again. That means set some tight stop-losses, or keep an exit point in mind.

Now, let’s look at DBA since 2010.

View Larger Chart

Share prices for DBA haven’t fallen as far as JJG. The Fibonacci levels show the 23.5% line has broken. Prices are now trading below that level. This is new, because we see that this line gave DBA support back in mid-March.

I consider the 23.5% line to be a little weaker than the 38.2% line. I think DBA could keep falling until it reaches the 38.2% level.

That would put DBA’s share price at about $30.60.

Of course, these lines are not guarantee for a bounce, so watch for prices to move higher from $30.60 before considering any action. As with JJG, keep tight stop-losses or a specific exit point in mind.

Both JJG and DBA have been falling for the past four months. A bounce at these levels doesn’t mean either of them will break that trend. That’s why a clear exit strategy is so important.

Editor’s Note: Taipan’s Kent Lucas has played the volatility in the nation’s food sector perfectly. When it comes to understanding the problems and the opportunities in the industry, there is none better than our Harvard-trained stock specialist.

In his latest report, not only does Kent show readers how to protect themselves from threats to the food supply, he also details three of the best ways to profit from the food crisis situation. To read his report, follow the link.

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