Famine in Omaha
Profit from the Fall
On Monday, I had the chance to toss back a few drinks on Water Street here in Baltimore. The Orioles were going to be losing to the Royals in a few hours, but we didn't know it at the time, so we reveled in the pregame, hometown baseball excitement.
I was meeting with a guy named Bill who was in the investment game and hailed from Omaha, Nebraska. He claimed he was "the other one," which got a laugh — meaning he wasn't Warren Buffet, the famous Oracle of Omaha.
We talked about a bit about Baltimore, which always comes down to that HBO series The Wire. I mentioned how when I was in Kenya, two Germans asked if Baltimore was like that... drugs and gangs and murder.
Like much in America, it is and it isn't. Baltimore is also about Under Armor, Johns Hopkins, and T. Rowe Price.
And besides, since the crack wave receded a decade ago or more and the 20-somethings moved downtown, the crime rate has been falling.
Crack is Whack
Then the conversation moved to Omaha, which apparently has the second-highest murder rate per capita in the U.S., a booming meth trade, and a rash of farmers heading towards bankruptcy — which isn't good.
Look at this chart of monthly corn futures:
After a couple of record years in 2011 and 2012, the price of corn has fallen off the table. The weather was perfect this year, and there is so much corn, ADM has run out of storage space.
Bill was saying... “Here's how farming works. At the start of the season, farmers go to the bank and get all the money they need to pay for seeds, chemicals, and labor, among other things. Then, at the end of the year, they sell their crops and pay the bank back. Most years, they have a little money left over and can do it again. Anything left over from that is pure profit.
At the end of 2012, after corn sold for over $8 a bushel, farmers in Nebraska all of a sudden had five times as much money as they ever had before. They went on a shopping spree. They bought every four-wheel drive vehicle you could imagine. The new Camaros — heck, even Corvettes — were selling like crazy.
Some of these guys built McMansions on their land and moved out of their 100-year-old farmhouses.”
“Farmers are dumb,” I said.
“Some are,” he replied, taking a sip of his Old Bay Bloody Mary. “Now that the price of corn is back below $4, many of these farmers are hurting. You see brand-new, one-acre homes sitting in the middle of a farm now for sale on Zillow for around $400k.”
Now, I don't know a damn thing about farmers, especially Nebraska farmers, except that they are tough as old, rusty bolts and they are susceptible to the madness of crowds just like any other group of humanity.
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Be a Smart Farmer
But I do know about markets. Two days ago, I told my readers of Options Trading Pit to buy calls on the VXX — a tool that would make them money when the market crashed. Yesterday, the Dow opened down 350 points, and our trade was up 276%.
Before you send me messages about “salt of the earth” friends of yours, I know there are plenty of farmers who used the boom times to pay down debt and are now sitting pretty and looking to buy some more land on the cheap.
These are the smart farmers who will grow and prosper in good times and in bad. In investing, you want to be a smart farmer. You want to buck the trend and think for yourself.
Here at Energy and Capital, we like to style ourselves as contrarians. We know the trick to investing is to buy low and sell high despite the fact that everyone else will tell you you're wrong.
Buy Low, Sell High, and Leverage Up
We know that when John Deere (NYSE: DE) is repossessing more machinery than it is selling, it means that next year the crop won't be so large. Heck, a five-year-old could look at the chart and tell you we are near a 10-year low in corn prices.
Yes, it is probably too early to get back into agricultural commodities. We are likely to see a sideways period like we did around 2009 and 2010.
Then again, making 100% gains in three years is nothing to sneeze at. The one thing we know about the price of corn is that it is low — which fits rule number one of our buying philosophy.
All the best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.
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