Market Overview

How to Play Soaring Grain Prices

With heat and drought enveloping much of the country over the last month, corn and wheat prices have been soaring. Both corn and wheat futures are sitting at new 2012 highs. On Thursday, both commodities added around 3%. In addition to trading the futures, there are also opportunities in the stock market to capitalize on surging grain prices.

Long Ideas

Potash (NYSE: POT) - This fertilizer stock has been surging over the last month, jumping almost 20%. Higher prices for corn and wheat provide pricing power for fertilizer companies and the entire sector tends to be positively correlated with agricultural prices. Potash, with a market-cap of $39 billion, is the largest of the popular fertilizer plays.

Agrium (NYSE: AGU) - This stock has jumped more than 19% over the last month and has taken out its old 2012 highs. On Thursday, AGU shares were up nearly 2%. Agrium could potentially challenge its all-time highs set in June 2008 above $100 in the coming months if money continues to pour into the fertilizer sector.

Mosaic (NYSE: MOS) - This stock is benefiting from the same trends as Potash and Agrium, but has been lagging the sector as a whole. Year-to-date, MOS is up a little better than 11%, but it has yet to eclipse its 2012 highs from February. If Mosaic could get through the $60.00 level on the upside it could continue to run.

CF Industries (NYSE: CF) - This company is smaller than its competitors in the fertilizer space, but the stock has been a consistent long-term winner. Over the last 10 years, CF is up more than 1,000% and the stock is sitting near new all-time highs. Year-to-date, shares have surged around 38%, giving CF a market-cap of over $13 billion.

Short Ideas

Tyson Foods (NYSE: TSN) - As grain prices rise, it puts upward pressure on feed prices for protein producers. Concern over rising prices and lower margins have hurt stocks like Tyson Foods. Over the last month, the stock has lost more than 3% despite a strong market environment. Shares traded lower on Thursday, down over 2%.

Smithfield Foods (NYSE: SFD) - This stock actually jumped over the last month, but was down more than 3% on Thursday. The longer-term trend is also down in Smithfield, which has lost almost 14% in 2012. The company's margins could be hurt going forward if grain prices continue to soar. Investors may be coming to this realization, as the stock significantly under-performed the market on Thursday.

Conclusion

While these trades may capitalize on continued bullishness in the agricultural space, contrarians may profit by shorting the fertilizer stocks and buying the food names. Given the trajectory of the move in grains, a sharp reversal is a possibility and betting against the herd in this case could prove profitable.

Posted-In: Long Ideas Short Ideas Futures Technicals Commodities Markets Trading Ideas Best of Benzinga

 

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