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A Buying Opportunity

Below is an article written by Jim Cramer detailing why now is a great time to buy the commodity stocks. Given the sell off we are in, I thought this summed things up nicely. Please note that his political views in this article are his own and may or may not reflect my own – how’s that for hedging 🙂

A Dollar Rebound Won’t Kill the Ag Stocks

By Jim Cramer Columnist

4/25/2008 7:06 AM EDT

Better seeds and more fertilizer. That’s it. Those are the technology weapons in the war against food shortages caused in the short term by a worldwide obsession with biofuels (we are the worst offender, of course) and in the long term by the increased affluence in China and India, which leads to more nutritious, protein-filled diets. Both forces, when combined with worldwide droughts and failed harvests, not augmented by the U.S. — we are late to start with our corn season — are driving prices up to ridiculous levels.

I have no doubt that if tomorrow the president of the United States said he was suspending the biofuel mandates for ethanol that we would see a collapse in food pricing. But I also have no doubt that this inept administration could never figure that out.

So, the solution comes to all of the stocks that were crushed yesterday: Monsanto (MON) , Potash (POT) , Mosiac (MOS) and Agrium (AGU) . Without better seeds that produce higher yields, without more fertilizer that increases yields, we are going to be facing a long-term continuation of these price increases and the attendant inflation and food riots.

Inflation, by the way, that has nothing to do with the Fed, unless the Fed is also a big granary hoarding wheat and corn. The shortage didn’t happen overnight. We have been over-inventoried for years in this country and around the world. We had grain storage that was so high for so many years that farmers sold land or it lay fallow. It wasn’t worth it to produce.

But the increase in oil, the food-for-oil mandate of President Bush, continued even more aggressively by Obama and Clinton — we have no idea where McCain stands, as his politics seem more of a global cooling initiative — and the lack of inventories have produced the monstrosity that we have now.

To be sure, the ethanol mandate is controversial. Potash, on its call yesterday, said that biofuels account for only 5% of world demand and the raw cost of food is only 20% of the cost of the packaged goods you buy in stores. They blamed most of the increase on the India/China/Asia affluence theory and the need to feed more chicken and beef to meet middle-class demands for protein. However, the incremental 5% is huge when the incremental inventories in granaries are now exhausted and the world has a food imbalance. Particularly because what’s happening is biofuels are screwing production away from some grains, causing others to shoot up, including rice.

I go into all of this simply for one reason. Yesterday all of these stocks were down. The immediate causes were press reports — ones that have largely been wrong by the way — that the dollar will bottom because the Fed is done, as if the dollar were controlled by the Fed and not our massive budget deficits. That triggered a decline in gold, which then sent the “signal” that commodities had topped, which then led to the selloff in ag.

Now let me ask you, in the whole panoply of things I just outlined about what caused food prices to go up, was there anything in there about the weak dollar? Maybe an incremental price increase in oil? Dubious. The food issue has three cures:

  1. better harvests, which you can get from good weather, better seeds and more fertilizer;
  2. more plantings, which, amazingly still hasn’t happened yet; and
  3. the end of the ethanol obsession, a universally reviled fuel in this country because — unlike in Brazil, which is fully committed — we don’t have the buy-in of the auto companies, the gas stations or the people. We just have the government and the voters of certain ag states and an amazingly powerful farm lobby.

Is that a reason to sell POT, Deere (DE) , MON, Bunge (BG) , MOS, AGU and the like? Or to buy ’em? You decide.