Oil has gone through the roof in recent weeks.
Hardly surprising... all you have to do is switch on the news to see how fragile things are in the Middle East.
And it's this fear that is putting the jeebees up the markets.
Production is going at full pelt and OPEC has pledged to keep it there. We may run out of oil in the long-term, but for now, supply-wise we're pretty comfy.
But, like I say, it's the fear that's putting volatility into the markets...
In my opinion, clever investors should turn to those commodities surging up as a result of the black stuff's mood swings.
You see, rising oil prices drive up demand for ethanol and other alternative fuels...
It's turning the once-sleepy corn futures market into a casino... and not only that, a variety of related investments are reaping the benefits.
Exchanges that offer investors a way to bet on tomorrow's prices for the yellow kernels - a key ethanol ingredient - have been inundated with money.
This little 'trick' will tell you an awful lot about the markets you're interested in...
The Wall Street Journal reported today: "Bullish commodity traders, along with farmers and food companies trying to manage risks, have pushed up the number of bets outstanding on the Chicago Board of Trade. Open contracts to buy or sell 5,000 bushels of corn in the future hit 1.39 million as of Monday, a 77% jump so far this year."
Checking the 'open interest' of a particular commodity is a way better measure of how much money is invested in the market than the number of contracts traded each day.
(Open interest simply means the net amount of outstanding open positions, either long or short, in a given futures or options contract)
And from one quick look it seems that ways to wager in the market for corn-based ethanol are flourishing.
An ethanol-futures contract introduced in March 2005 on the CBOT, for example, hit a record of 1,068 open contracts on 10 July.
Although it's still relatively small compared to other, more widely traded contracts, that's still 20 times the number a year ago...
The reason?
The pros are flooding into 'ags'
One is because the U.S. Government has increased requirements for blending ethanol into gasoline and mark my words, Britain is following suit.
At the London Motor Show last week, BMW launched their first sports car run entirely on 'green' bio-fuel... and back in March the first biol-fuel plant opened in Norwich.
The activity over in the States has grown so frenzied that the CBOT, a unit of CBOT Holdings Inc., this month leased out the last remaining booth on its agricultural- futures trading floor - desk space for traders and clerks!
By contrast, its financial-futures trading pit has ample space for newcomers.
According to the WSJ, "a full-privilege membership, or seat, on the CBOT sold at a record $3.2 million in April. Full-membership seats, which confer the right to trade on the exchange, were selling for about $2 million last summer."
Prices have been volatile... both corn and ethanol spiked earlier this summer, falling to what are historically high levels.
Corn futures are up 11% so far this year to $2.3950 a bushel. (A bushel is equal to 56 pounds of shelled corn, or the number of kernels on about 90 ears of corn.)
Ethanol futures are up 25% year to date, to $2.608 a gallon.
Wheat prices have hit 10-year highs as a summer drought limits crop yields and demand increases for wheat-based fuels in Europe and elsewhere.
And as reported by Reuters: "In the stock market, speculators are welcoming a bumper crop of initial public offerings of stocks in ethanol makers.
"Investors with a longer-term view are amassing agricultural and undeveloped land around the world on the belief that values will skyrocket amid competition between crop-based fuels, known as bio-fuels, and demand from an increasing Asian population with the means to buy more food and a greater variety."
Some sceptics will of course warn that ethanol can't solve the U.S.'s - or Britain's - energy needs, simply because it takes so much energy to produce, and generates less energy per gallon than petrol.
The market for ethanol could suffer if oil prices drop and make alternative fuels less attractive. And prices could fall as more ethanol production comes online and the summer driving season ebbs.
Corn is vulnerable to big price fluctuations depending on weather and global crop yields.
But the technology for many other bio-fuels is still developing... it's one for the future and something you should look out for, especially those companies who are the innovators in this emerging industry.
Why the big money will be in the agricultural markets for the next few years
I'm a big fan of the agricultural markets... there are a host of factors pointing to an excitingly volatile but long bull market...
The big hedge-fund industry will look at the 'ags' as the next sector to invest in...
Speculators have still yet to really pour in!
High fuel prices, along with government subsidies, make ethanol plants enormously profitable. Makers can buy corn at $2-plus a bushel and make $5 to $6 profit from that raw material. Production is also getting more efficient.
Dozens of ethanol-production plants are getting financed, including a wave of projects in Texas and on the East and West coasts, says the WSJ...
"The building of these plants contributes to market speculation in corn, because lenders to ethanol producers are insisting that they hedge against further price spikes in corn, their single biggest expense.
"Add to the calculus that energy-and-food consumers around the globe are set to compete for limited harvests."
World corn stocks are at their lowest levels since 1984, and the U.S. is devoting an increasing amount of its crop yields to ethanol.
China, a major exporter of corn, turned into a net importer in June. Wheat inventories are low (just as Europe plans to devote more of it to bio-fuel production) and India has become a net wheat importer, rather than exporter, to feed its increasing population!
Meanwhile, reports Reuters, "farmers, food producers, and livestock-feed sellers have joined some commodity- based hedge funds and ethanol makers in betting years into the future on crops..."
This behaviour was once shunned as far too risky...!
For the past decade, investors have had a few hundred to 1,000 bets outstanding on so-called 'long-dated' CBOT corn contracts... Now the open interest has shot to more than 50,000 in December 2008 contracts, according to the exchange's website.
It's a phenomenal turn of events and makes me even more certain in my view that we're on for one heck of a bull run.
Until next week,
James Woodburn
Profit Watch
