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The Forgotten Commodity Report

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©2006 - 2008 Copyright MHI, LLC • All Rights Reserved

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First Revision 06.14.2007 Second Revision 01.07.2008

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by Shane H. Rawlings 8/30/2006


The Forgotten Commodity There are certain investment opportunities that only come along once in a lifetime. These opportunities can make an investor incredibly wealthy. For instance, those who bought equities in the early 80’s became extremely wealthy over the next 25 years.

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Right now I believe the best investment opportunity for the next 10 to 20 years will be in “soft” commodities, specifically grains. The commodity I refer to in my promotional materials as the Forgotten Commodity is corn.

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At the time I first wrote the report, in August of 2006, corn had been ignored by most investors for over 15 years. And rightly so, it had been in a persistent downtrend for nearly 30 years. At the time we initiated our buy signal corn was trading at $2.45 per bushel. Almost immediately it started a strong bullish advance rising as high as $5.00 per bushel before pulling back. This last pull-back gave investors a second chance to get on board, however, corn has once again resumed the uptrend and is a bit overextended, in my opinion, to initiate any new positions. The prudent thing to do would be to wait for a pull-back before entering.

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The primary method I use to identify investment/trading opportunities is a technique known as the Elliott Wave Principle (EWP). I couple EWP with other technical and sentiment indicators. At the time I first recommended corn it appeared it was completing wave 5 of wave C of a large ABC correction that began in 1970 (see chart below). Now looking back, that is exactly what was occurring. To better understand EWP refer to pages 41 – 59 in The Profit Forecasting Code.

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Aside from the technical argument for a new bull market in corn I would like to briefly discuss some of the fundamental drivers behind the new bull market in corn as well as the coming bull market in other “soft” commodities.

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With the price of crude hitting $100 per barrel, and concerns over peak oil production and our dependence on foreign oil, savvy entrepreneurs are frantically racing to develop new alternative fuel sources. One of those alternative fuel sources is ethanol, which is produced primarily from corn and sugarcane, but can also be produced from other grains and biomass materials.

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US ethanol production climbed to almost 5 billion gallons in 2006 up nearly 1 billion gallons from 2005, however, production is expected to grow to 10 billion gallons by 2009. This explosive growth in US ethanol production is being driving by both market forces as well as political policy.

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The Energy Policy Act of 2005 and other existing Federal and State biofuel programs are providing large incentives for the expansion of US ethanol production. At this point, most US produced ethanol is coming from corn crops, although other cellulosic biomass materials show future promise.

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According to the US Department of Agriculture’s Acreage report, (June 29, 2007), farmers planted nearly 93 million acres of corn this year, up over 14 million acres, or 18.6 percent from 2006. But it is not just ethanol production that will continue to drive the demand for corn higher. With economic growth in countries like China and India the demand for food commodities will only continue to increase, yet supply will become tighter and tighter. The grain required to fill a 25-gallon gas tank with ethanol will feed one person for an entire year. 


The Forgotten Commodity The final driving force behind rising corn prices are the severe drought conditions that most of the world finds itself in. Some of the worst in the last 57 years. Disastrous drought conditions are vaporizing world grain reserves.

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Each year, in October, the U.S. Department of Agriculture issues a report showing the growing demand for various crops compared to current stockpiles. The report released in 2006 revealed that blistering droughts in both the US and Australia have caused a significant drop in international grain supplies.

• England’s recent winter second driest in 100 years. • Australian drought worst in a century.

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Consider this:

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But the current drought is not just limited to US and Australia. The area of the earth’s surface that is stricken with serious drought conditions has more than doubled in the last 30 years.

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• Portugal facing worst drought in 300 years.

• Spain experiences driest conditions in 60 years.

• Eastern Africa suffering from severe drought for six years in a row.

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• 63 of 76 provinces in Thailand suffering from drought.

• 60 percent of the US has abnormally dry or drought conditions.

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At the time I first wrote this report current grain stocks were sitting at a very dangerous level of only 57 days of consumption. The last time grain stocks reached this level prices immediately doubled. As you can see from the charts below corn once again doubled in price from our initial recommendation price.

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But I believe the price of corn has a lot more room to run over the next decade. And it is not just corn that is being affected, wheat, soybeans, sugarcane, and most other “soft” commodities are being affected as well. This is evident from the charts below. Wheat moved 140% form our initial recommended buy price of $3.96 per bushel, soybeans moved 125% form our initial recommended buy price of $5.44 per bushel.

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As the war between food and fuel consumption continues, the price of most grains and other soft commodities will continue to sky-rocket. Food costs will likely quadruple in the next 5 to 7 years. This is unfortunate for consumers who won’t see it coming but creates one of the best investment opportunities I’ve ever seen.

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Important Notice: Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. 


The Forgotten Commodity

Corn

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The chart below displays a 30-year bear market or correction in the price of corn. The ABC correction was perfect and as you can see from our initial buy price of $2.45 a bushel corn has staged a nice rally. The price of corn has already doubled from our initial buy price but is still in the very early stages of a new bull market that could last for the next 10 years and ultimately cause the price of corn to quadruple.

Monthly pit chart of corn courtesy of Trade Station Securities; http://www.tradestation.com

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IMPORTANT UPDATE FOR CORN

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Important update for corn. We first issued a buy signal on corn on 8/30/06 at $2.45 a bushel. Since that time corn had a nice run up to around $4.48 a bushel, it then pulled back and offered a second entry opportunity for those who missed the first. Unfortunately corn has once again taken off and may be a bit overextended for a new entry at these levels. It might be more prudent to wait for the next pull-back before initiating any new positions. Long-term I’m still very bullish on the price of corn and expect it could easily hit $10.00 per bushel in before 2010.




The Forgotten Commodity

Wheat

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The following chart of wheat has a very similar pattern to corn. The pattern appears to be working. Our initial buy recommendation on wheat was at $3.94 a bushel. Today wheat is trading at around $9.03 a bushel. That’s a 129% move in less than 18 months. In my opinion, wheat is now overextended to the upside and needs to pull-back before initiating any new positions. Long-term I’m still very bullish on the price of wheat and believe it could hit $15.00 per bushel before 2010.

Monthly pit chart of wheat courtesy of Trade Station Securities; http://www.tradestation.com

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IMPORTANT UPDATE FOR WHEAT

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Important update for corn. We first issued a buy signal on wheat on 8/30/06 at $3.94 a bushel. Since that time wheat has had a nice run up to around $9.00 a bushel. Wheat is a little overextended on a short-term basis and one may want to wait for a pull-back before initiating or adding to any existing positions. Especially considering the risk and leverage associated with trading commodities.




The Forgotten Commodity

Soybeans

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At the time we first wrote this report (8/30/06), the soybean market had already completed its 30-year bear market and appeared to have completed the first leg up (wave 1) in the new bull market along with a counter-trend correction (wave 2) against that impulse wave giving a second chance to investors to get on board. Now looking back we were absolutely correct in our analysis of the soybean market. Wave 3 in a bull market typically is the most dynamic wave and that is what we are seeing. At the time of our initial buy recommendation soybeans were trading at $5.44 a bushel. Today, only 18 months later the price of soybeans has sky-rocketed 129% to 12.49 per bushel. To better understand EWP please refer to pages 41-59 in The Profit Forecasting Code.

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Monthly pit chart of soybeans courtesy of Trade Station Securities; http://www.tradestation.com

IMPORTANT UPDATE FOR SOYBEANS

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Since we first issued a buy signal on soybeans they have moved from $5.44 a bushel to $12.49 a bushel. As a long-term investment soybeans still offer a great opportunity, but short-term they are a bit overextended and one may want to wait for a significant pull-back before establishing a new position or adding to an existing position. Especially considering the risk and leverage of associated with trading commodities.




The Forgotten Commodity

Sugar

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The bear market in sugar looks like it ended in the early 90’s and has been building a rounding bottom ever since. Price appears to have completed the first wave up in a new bull market along with a counter-trend wave 2 correction. Sugar should be putting the finishing touches on wave C of wave 2. When this correction is complete wave 3 up should start which will be the most dynamic move in the new upcoming sugar bull market. Sugar could easily move to $70 to $90 over the next decade.

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Monthly pit chart of sugar courtesy of Trade Station Securities; http://www.tradestation.com




The Forgotten Commodity

Conclusion

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I believe the technical picture presented in the charts coupled with the increasing demand for food commodities to produce alternative forms of fuel and growing populations in emerging countries make a strong argument for the continued bull market in most “soft� commodities.

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However, my view is a big picture view and there may be short-term price swings in many of these markets. Because the futures markets are very volatile and carry a substantial amount of risk, I believe it is prudent to properly educate yourself about the risks associated with trading commodities and futures before you start buying contracts on the markets I have discussed. There is the potential for substantial loss when trading in the futures markets.

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One way to limit this risk is to trade options on these futures markets. Buying an option would reduce the risk because you can never lose more than what you pay for an option. However, there is still a substantial amount of risk involved in trading options and one can lose his entire investment due to the time decay factor of options. Therefore one should only commit capital he can afford to lose to buying options.

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If you have never traded futures or options I would strongly recommend you first educate yourself about strategies and methods you can use to improve your chances for success as well as proper money and risk management techniques.

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A safer way to play the coming bull market in corn, wheat, soybeans, and sugar is to buy a stock that will benefit from an increasing grain demand. The stock that I feel will benefit the most from the coming bull market in soft commodities is ADM. Also there is a new ETF that tracks corn, wheat, soybeans, and sugar. The ticker symbol is DBA and has a 25% weighting in the four commodities. Buying ADM and DBA as long-term investments are much safer ways to take advantage of the coming bull market in soft commodities.

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Before you jump in and buy these stocks I would recommend you consult The Profit Forecasting Code to better understand how to time your entry. Also, on the London exchange there are ETF’s that track the individual price of corn, sugar, soybeans, and corn.




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© 2006 - 2008 Copyright MHI, LLC • All Rights Reserved


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