TECHNICAL ANALYSIS: Agriculture

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Editor’s Note: With everything that has happened in Europe over the past few days, it is clearer than ever that your wealth is not safe in fiat currencies. Not only is the world in a race to devalue currencies, central powers have no problem proposing out right confiscation of those who are simply saving currency in a bank account.
Everyone knows I’m extremely bullish on real things right now, screw the fiat currency measuring stick. I’m looking for real businesses, precious metals, and real estate.

Below is a great hard asset article from Joshua Enomoto, FutureMoneyTrends.com contributor.
Regards,

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Daniel Ameduri
President, FutureMoneyTrends.com

Agriculture: A Demand and Inflation Hedge

By Joshua Enomoto, Founder of ContangoDown.com and FutureMoneyTrends.com contributor

Confession time: nobody cares about agriculture. It isn’t cool, it isn’t sexy and seriously…when was the last time you were scoping CNBC’s ticker tape for the latest spot price of corn? Perhaps because of its ubiquitous nature, agriculture as an investment vehicle is stuffed well behind the depth chart led by crude oil and precious metals. But the (truthful) criticism that the aforementioned commodities “cannot be eaten” gives the agricultural sector an insurmountable edge: we will literally die without it.

As with any investment vehicle, there are technical bull and bear cycles of various time lengths that need to be considered in order to maximize gains: just because we need a particular commodity does not necessarily mean that every price point will be an attractive one. For the agricultural sector, it pays to understand the market dynamics of one of its underlying components, and one such example is the spot market for wheat:

Spot-wheat saw a tremendous run up following the Federal Reserve’s announcement of QE2, which also saw gold and silver bullion reach record highs due to the inflationary pressure delivered to the monetary supply. After nearly a year of consolidation, wheat along with other agricultural and non-renewable commodities experienced another parabolic bull run, which was in part due to the investment community pricing in their anticipation of QE3.

However, the sustained highs of post-QE2 policies could not be repeated, most likely from the fact that the velocity of money had dramatically increased, thus creating a deflationary pressure and a rising dollar valuation. Fluctuations in the FOREX market, most notably the declining Yen, added to dollar strength and lower overall commodity prices. This essentially has opened up an attractive buying opportunity in agriculture, but how should everyday investors play this market? After all, very few outside the farming community are interested in stacking bushels of wheat and balsa wood.

Manufacturers of farming equipment could see a substantial rise in their stock appraisal if the agriculture sector enters another bull cycle: for one, these companies provide the mechanical infrastructure to profitably harness God’s green earth. But, just as significantly, equipment manufacturers often have a lengthy portfolio of product offerings, thus ensuring that their risk exposure is never limited to only one consumer segment.

One popular manufacturer is Agco Corporation, or ticker symbol AGCO:

AGCO peaked at a little over $70 per share several months prior to the 2008 financial collapse, so at its current valuation of nearly $55, there is a potential 26% profit to be made should the company resume its parabolic ways. Clearly, the price action is funneling into a pennant formation, as peak price movements are capped at decreasing levels and conversely, volatility is being supported at incrementally higher valuations.

Technically speaking, the apex of a pennant formation usually results in a massive breakout move, either to the upside or the down. While it’s difficult to forecast precisely, there are signs to suggest that investors should tread cautiously: volume is not confirming the direction of the price, and market participants are having a difficult time breaking the sharply declining resistance line. Ultimately, I would be a buyer at around $28, since AGCO has been a strong performer in the past and I expect the trend to continue.

Another prospect is Lindsay Corporation, or ticker symbol LNN:

Immediately, the difference between LNN and AGCO are apparent: first, there is the massive 550% parabolic move from an average price of $20 per share to over $130, and since the bursting of the bubble, LNN has charted a series of higher highs and higher lows. The current price action is challenging the 61.8% Fibonacci retracement off its peak, which may add a measure of confidence to the conservative investor.

However, there are some risks to consider: the peaks and valleys of the price action post-2008 is extremely erratic. If an investor is not careful enough to sell near the highs, he or she could end up riding the stock to a -40% loss. Since there is some hesitancy in convincingly clearing the 61.8% Fibonacci level, it is conceivable that we could see a quick drop back to 50 or 60 dollars. Continued meanderings within the Fibonacci ratios may not be the best thing for LNN as volume over the past five years has declined, although it is important to point out that bullish volume has been on the rise in recent trades. Certainly, a return to a $130 share valuation is a key speculation, one that continues to bring in investment demand.

Finally, my favorite stock in the agricultural equipment sector is Kubota, or ticker symbol KUB:

Kubota stock has something for everyone. For the conservative investor, KUB has established a long-term trend channel since 1998, with the overall direction of the stock very much bullish. For the short-term speculator, KUB’s trading behavior has been fairly consistent, which suggests that the next likely move will be a re-test of the 40 to 50 dollar price range before ramping up again.

Out of the three companies mentioned, KUB is the only one that has exceeded its record 2008 price due to the emerging bull market in Japanese equities that I mentioned back in November of last year. At present, the main driver for the bull market is the rapidly depreciating Yen, which has lifted up nearly all Japanese stocks traded within the American Depository Receipts. However, the big customer for KUB products is the United States with its vast stretches of farmlands and high demand for quality machines. A rising dollar in conjunction with a weakening Yen would only serve to incentivize the demand, making KUB a no-brainer stock within the agricultural sector.

Admittedly, it takes a certain level of courage to invest in areas where the masses are absent; however, the key to any profitable venture is to envision where the masses will end up, not where they presently stand. With all the attention firmly focused on the record-breaking equities sector, it’s important to return back to the basics: secular markets may not have the outward appeal of cyclical trends, but a reversion to the mean can make them nonetheless profitable!

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