The Profit Potential of Global Warming

It’s taken me nearly 10 years but I’ve finally found a way to profit from global warming (and other extreme weather events.)

In the past I’ve simply lamented about the global warming pandemic. Fact is, with all of the back and forth in the media it’s hard to discern any real truth in the matter. But, regardless of which side of the argument you’re on, you’ve got to admit one thing: there’s a lot of money sloshing around. (Think: billions and billions.)

Well, today I’ve got a way to play it. Let’s look at what could be the year’s best contrarian commodities play…

This from Bloomberg:

The past decade included Europe’s hottest summer in at least 500 years in 2003, while 2010 brought western Russia’s hottest summer in centuries and record rain in Pakistan and Australia, according to the Potsdam study published in the journal Nature Climate Change. Japan and some U.S. states registered all-time-high rainfall in 2011, while the Yangtze River basin in China had a record drought.

Weather extremes may cause agricultural production to move away from “extreme specialization,” where farmers who can no longer be certain of spring rain for a particular crop may grow four or five different ones instead, according to Hermann Lotze-Campen, a researcher at the Potsdam institute.

Over the past few years, commodity farmers dealt with the reality of extreme weather events – from 100-year droughts to 100-year floods. Growing staples like corn, wheat, soybeans, rice, coffee, cocoa, orange juice and more, farmers have seen many ups and downs – and I expect to see a lot more of these large-scale weather events in the coming years.

For our purposes here it doesn’t matter much if these events are caused directly by global warming or not – in fact, we’ll leave that up to the experts to debate.

Indeed, it almost doesn’t matter that heat waves, droughts, tsunamis or other volatile weather patterns wreak havoc on crops. Just the threat of these 100-year weather events is enough to goose prices.

The idea behind my thesis is simple. A heat wave or cold snap across the globe could urge farmers to up their ante on crop insurance, buy more resilient seeds, try a stronger type of fertilizer or go to any other further measures to prevent crop spoilage. In short, farmers are paying more to protect their crops from one-off events.

Furthermore each year the world is demanding more and more foodstuffs. Demand is ratcheting up in emerging markets for grains and feed for livestock. Add it all up and demand is pushing farmers to their limits. In that sense farmers MUST get everything they can out of each crop.

When it comes to preparing for extreme weather events, the cost of farming is likely to rise. And that will lead to a simple, but surefire rise in the price of many commodities.

But this is only part of the story, as you’ll see…

The debate surrounding global warming and volatile weather is just one example of things that can go wrong in the world of growable commodities. It’s a clear-cut reminder that no matter how much we think we’re set for another year of the status quo, we may not get what we expect.

Indeed, over the past few years, even in the face of on-and-off weather events we’ve seen bumper crops the world over. Whether it’s coffee in Vietnam and Brazil or wheat in Russia and the U.S., we’ve seen stockpiles consistently grow over the past few years.

Lately, the market has started to factor in all but perfection for many of the most common staple commodities.

But today I’d like to warn you not to bet on this “perfect” scenario.

I’ve said this in the past but it’s worth reiterating today: all it takes is one bad season for prices to rise. Drought, flood, crop-plague, strike, political up rise… any of these events could lead to a short-term disaster.

And when “perfection” is built into the price of commodities, there’s a straight forward opportunity for investors like us.

This looks to be the case in the corn market…

2012 is a distant memory for corn traders these days. Back then, a summer drought (one of the worst seen in generations) wreaked havoc on the corn crop – cutting the year’s crop by 13%.

2013, however, was a bumper crop. The U.S. produced the most corn on record – and stock houses were filled to the brim.

Today traders are pricing in perfection – a perfect, bumper crop – for the corn market. A quick look at the price of corn, and you’ll see that prices are the lowest they’ve been since 2010.

Today we’ve got a solid opportunity brewing to play the bottom of this beaten down commodity. After all, the traders are pricing in perfection – and reality is hardly ever perfect.

The easiest way to play this contrarian trend is by looking at shares of Teucrium Corn Fund (CORN.) The fund gives you direct access to the corn market – correspondingly, shares of CORN are also at 3-year lows.

Right now, before the 2014 growing season gets fully under way, we’ve got an opportunity to buy in to CORN at a bargain basement price. Looking ahead if the corn market moves away from its blue-skies estimates, we could see a solid double-digit gain.

Here are the pros and cons of buying into an investment vehicle like Teucrium’s Corn Fund:

Pros: First and foremost you can buy and sell this fund easily – just like any other stock. The fund also gives you direct exposure to corn prices – since it holds corn futures contracts (unlike buying something like Monsanto or John Deere.) So if the price of corn bucks the popular consensus this fund will be an easy way to play it.

Cons: This fund is leveraged. That means that instead of holding physical corn, the fund holds futures contracts. While this is good for direct exposure to the commodity it also has a very distinct drawback: since the fund has to continually buy/sell futures contracts the costs of doing so acts as a strong headwind. This isn’t a fund that you’d want to buy and hold for a long time. (Luckily we’re only looking to hold this for a short-term gain.)

Add together the recent string of weather volatility and an all but perfect estimate for this year’s yet to be planted crop, and you’ll see that we could be in for a pop in corn prices.

Right now the price of the Teucrium Corn Fund is beaten down – I’d be a tentative buyer (with a small speculative bet) around $30. Any sign of drought or extreme weather early in the growing season and we could be in for a quick 20, 30, or 50%.

Stay tuned. I’ll keep you updated on this contrarian commodities play.

Keep your boots muddy,

Matt Insley
for The Daily Reckoning

Ed. Note: The commodities markets could prove to be very interesting this year. And Matt will be there the whole way, informing his Daily Resource Hunter readers of the best investments stories these markets have to offer. Don’t wait another day. Sign up for the FREE Daily Resource Hunter email edition, right here.

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