In part 1 of this series, we reviewed the trends in financials, fossil fuels and electricity. This week, we take a look at renewables, food and fertilizer.

Renewable Energy

The picture for renewable energy just keeps getting better, as more of the world begins to realize that we are having a real problem maintaining our traditional energy supplies. I have no doubt now that a big revolution in energy has begun. Mark my words: This is the time to go long on renewable energy, for the long term.

Consider this chart of a few of my favorite renewable stocks against the S&P 500:

After being beaten down harshly in the first quarter, along with just about everything else, renewable energy shares bounced up like spring flowers, handily beating the indexes by 20% or better.

Meanwhile, the chatter about controlling carbon emissions has only gotten louder, particularly as bad weather hits everywhere (which we’ll get to in a moment). I expect this trend to continue, and would not be at all surprised to see some sort of binding legislation passed within the next year.

As I have detailed in my book, I favor a carbon tax over cap-and-trade schemes, for a variety of reasons, but I would be happy to see any sort of binding controls established. When that happens, you will definitely want to be holding some solid, reputable renewable energy companies in your portfolio, because it’s going to put new fire under the whole sector, even as it puts the hurts on oil and coal.

Agriculture

Food production has come about even with energy as the world’s top concern since my review of the first quarter. Riots, hoarding, and intermittent shortages became more common, and everyone from the UN to the Saudis put it on the front burner.

My observation was borne out in an unexpectedly harsh way:

Not only are food and energy closely interrelated, but weather is right in the mix too. The increasing use of fossil fuels contributes to global warming, which reduces food production, as was the case with the Australian wheat harvest. At the same time, weather impacts our ability to produce energy…and back around the wheel we go.

Flooding in the Midwest this spring has ruined an estimate 5 million acres of land, and harvests have been delayed because the fields were too wet to work. While parts of the West like California had the driest spring on record, parts of southern Indiana, Illinois and Missouri have endured the wettest spring on record. (Inversely, China’s agriculture ministry instructed wheat and rice farmers in southern China a few weeks ago to harvest as much of their crop as possible before another wave of rains arrived.)

With fields too wet to sow corn, many farmers opted to plant soy this year instead of corn. The corn harvest this year is expected to be 10% lower than last year, and soybean plantings are running about 16% behind last year.

Consequently, corn shot from $5.82 at the end of Q1 to a record $7.92 last week. The spike in corn prices was due to the torrential rains that soaked the Midwest starting in late May, and in a mere two and a half weeks, corn prices went up 28%.

Ethanol production is expected to increase 25% over last year, and consume about 4 billion bushels of corn out of the 86 billion that will be sown this year. In the face of record corn prices, the cattle and poultry industries have been lobbying the EPA to cut the nation’s ethanol production mandate in half.

They’re not the only ones. Policymakers are realizing that corn is a very inefficient way of trying to produce biofuel, and might not be worth it. (That has been my position on corn ethanol since the beginning.) The corn ethanol plays have suffered the fallout:

The one bit of good news for grains is the worldwide wheat harvest, which is expected to be about 8% higher this year than last. The expectation brought the price of wheat down from a record $13.50 per bushel on Feb. 27 to $8.70 today, about where it started the year. Still, wheat remains about 50% higher than it was a year ago, and the harvest below average levels.

The big picture for agriculture is clear enough: demand is higher than ever, and supply is faltering. (Reminds you of anything?)

The flooding of the Mississippi had another unexpected consequence: The levee breaks shut down transport on the river, stranding 100 barges. Mississippi barges are the primary mode of transport to get grain from the Midwest to export terminals in the Gulf of Mexico. Grain giant Cargill alone had 200,000 bushels of corn sitting on the dock, unable to get a barge.

If you took my recommendations on fertilizer at the beginning of Q2, you are smiling now:

FEED has clearly sold off a speculative bubble, so I wouldn’t touch that one now (and I hope you got out with some nice gains, as I did). But Mosaic and Potash Corp. are still good bets to hold, because I don’t see any reason to think the food supply situation is going to radically improve any time soon. In fact, this looks like a nice little buying opportunity.

As one would expect for a diversified play, the more general agriculture ETFs I suggested have performed more modestly than the fertilizer plays, but who would complain about a 10-30% gain in a quarter, especially when the S&P actually fell a few percent?

I remain bullish on the ag ETFs, at least until we get a significant change in the supply and demand balance.

Metals

The metals group I suggested hasn’t done quite as well, but if you picked the better stocks over the ETFs, you made out alright:

My read of the metals group is that it’s probably ripe for a recovery, as the last couple of weeks are showing. Considering that the building boom is still going strong in Asia and the Middle East, and that shortages of basic building materials like iron are still happening regularly, I think this is a good time to jump into metals if you’re not in already.

On the whole, as bad as the news has been in energy, agriculture, finance, and the economy in general for the past quarter, I have to say I saw it all coming. I banked on it, and I’m still banking on it.

With an economy on the ropes, the financial sector going down in flames, food prices skyrocketing, oil prices causing widespread inflation and the Fed helpless to do anything about it, a lot of investors will end this year with a lot less money than they started it.

But not us. In fact, we expect to turn some nice gains, by reading the signs rightly and playing them smartly.

Gains like the ones you’ll make from our energy picks, when you sign up for the $20 Trillion Report.

Until next time,

Chris

Commodities Soar as Stocks Sink

Last week, I wrote about the skyrocketing cost of food and why it makes agricultural commodities an attractive sector for investors.

Since then, the headlines have been blaring about riots and violence around the world over the prices of rice and other staples.

Over the weekend, G7 finance chiefs huddled up and tried to come up with a game plan for coping with the fast-falling dollar and the global effects of the ongoing credit crisis in financial markets.

At the same time, the world’s top economic ministers at the IMF and the World Bank had their own weekend pow-wow to grapple with the emerging global food crisis.

Take note: these were weekend emergency summit meetings. Like the one that the Fed had with JPMorgan and the gang before they announced the Bear Stearns bailout just a few months ago. This is serious stuff.

In the end, the president of the World Bank, Robert B. Zoellick, entreated the world’s wealthiest countries to replenish the coffers of the World Food Program. With skyrocketing food prices and a budget that has not grown to match, the program has been unable to keep feeding all the people who depend on it.

"We have to put our money where our mouth is now, so that we can put food into hungry mouths," he said. "It is as stark as that."

How the U.S. responds to that challenge will be telling. Will we reassert our commitment to feeding the world’s hungriest mouths? Or will we discover that our spirit is willing, but our flesh is weak?

As much as I’d be proud to see America redouble its foreign food aid efforts, my money is riding on the latter outcome.

The way I read the situation, most of the world, even the wealthy part, is close to its own limits on several fronts.

The balance between energy supply and demand–not just in terms of oil but natural gas, coal, nuclear and all the renewables–has gotten a little tighter every year.

As energy prices go up, it drives up prices across the board. Perhaps we should modify the old saw to "Energy inflation is the cruelest tax."

First World consumers may not be hurting as badly from food cost inflation as the Third World is, but they’re hurting. And they’re going to find it difficult to share more of the shrinking amount on their own tables. Global grain stocks are now at record lows.

We seem to be pushing the limits on everything people consume. And the more fungible something is, the more global is its supply and demand equation.

Case in point: The slowing of demand for various commodities in the OECD is being more than offset by the still red-hot economies of China (11% annual growth rate) and India (9%), as well as the obscene boom in luxury construction occurring in the Middle East.

Speaking at the G7 meeting, Alistair Darling, the British Chancellor of the Exchequer who is responsible for economic and financial matters, highlighted the global nature of the problem. "For the first time in a generation we are seeing inflationary pressures that are not home-grown but are being imported," he said. "Food prices are rising. Energy prices are rising. Commodity prices are rising."

America, for her part, seems in no financial position to be doling out more aid. Wars financed by debt, fraud in the mortgage markets, unfettered and overleveraged instruments of financial speculation, a Fed intent on destroying the dollar, and soaring energy costs have put the U.S. economy on the ropes. As my colleague Ian Cooper recently pointed out, even Alan Greenspan has admitted that we’re in a recession.

The U.S. paid $430 billion just in interest on the federal debt in fiscal year 2007. Add in the Pentagon’s own conservative estimate of $600 billion in costs for the Iraq war so far, and there’s a trillion right there. In a $13 trillion economy, that’s real money.

We’ve got a big hole in our pocket and the spare change seems to have disappeared.

We simply lack the slack to help our neighbors much more than we already do.

Commodity Crunch is a Guaranteed Bull Market

I have been expecting this, as I have watched the peak oil crisis begin to unfold over the last five years. It was only a matter of time before the world started to reach its limits on energy, and then, food. Remember, on average, for every calorie of food that comes to your table, it takes the investment of 10 calories in the form of fossil fuels.

My long time readers know my position: There is only one way to bring food and energy prices back down to earth, and that is to reduce demand. There are no long term supply side solutions.

To reduce demand, we must:

1. consume less;
2. reduce population;
3. stop turning food into fuel;
4. and eat low on the food chain: less meat, and more grains and beans.

Unfortunately, all four are bitter pills for those who still want to believe in limitless growth, and chase the dream known as The Non-Negotiable American Way of Life.

Until a majority of people understand the earth’s supply limits, I don’t expect much in the way of deliberate demand reduction. We’ll probably do it the hard way, continuing to demand and depend on more of everything, until we simply can’t get it anymore.

So while many investing pundits out there are assuming that higher prices will bring on more supply, and predicting that commodity prices will see a major correction this year and a return to the mean, I’m making a much more bullish call:

Commodity supply will not rise to meet increased demand, and prices will continue up for a long while to come.

Yes, there will be corrections when we hit record highs and profits are taken, as we saw during the selloffs in January and March. But then prices bounce right back up and exceed the previous highs, as several of the key commodities, like oil, have already done.

At this point, I think I’m looking at a double-bottom in March, and a set up for another push to the moon.

For these reasons, and others I have outlined in my previous articles on the subject, I believe we are looking at a secular bull market in commodities in general, but particularly in agriculture, energy and metals.

I think it’s going to take a while before the Street realizes that we’ve entered into a new era in agricultural commodities, just as it took several years for it to accept that oil wasn’t ever going back to $40.

That’s why the profit-seeking missiles here at Wealth Daily and Energy and Capital have jumped on the sector.

So let’s take a look at some ways to play it.

Stocks

For individual stocks, I like fertilizer companies and diversified hard commodity companies.

Among fertilizer plays, I favor The Mosaic Company (NYSE: MOS), a producer of phosphate, potash, and nitrogen fertilizers, as well as animal feed. They are perfectly positioned to command nice profits in the ag commodity crunch, and it’s a broadly traded, $56 billion company. It’s hard to find a safer play than that.

Similarly, the Potash Corp. of Saskatchewan (NYSE: POT) is an integrated fertilizer and feed company, with six potash mines and a whole slate of nitrogen and phosphate fertilizer products. It’s about the same size as Mosaic at $57 billion, and has performed similarly well.

For a speculative way to play booming meat consumption in China, take a look at AgFeed Industries (NASDAQ: FEED), which supplies feed to China’s domestic pork industry. China, if you didn’t know, is the largest pork producer in the world, raising over five times the number of pigs that the U.S. does. Almost two thirds of the meat consumed in China is pork, their primary meat, and almost all of it is produced domestically. AgFeed is a small company compared to some of the others mentioned here, with a $458 million market cap, but its performance this year has been outstanding.

As for hard commodities, I like BHP Billiton (NYSE: BHP), a $214 billion Australian company that mines and produces coal, gas, uranium, various metals, and diamonds. For a broad-based approach to investing in critical materials for energy and construction, they’re an excellent choice.

A similar play to BHP is Companhia Vale do Rio Doce (aka Vale, NYSE: RIO), a $174 billion Brazilian diversified metals and mining company that produces a wide variety of metals, industrial minerals and potash. Among other things, they have a joint venture with BHP to produce aluminum in Brazil, and the two stocks track quite closely.

Another good, large diversified mining company is Rio Tinto Group (NYSE: RTP), headquartered in London and Melbourne. It competes head to head with BHP and has been a takeover target for them.

ETFs

There are a goodly number of exchange-traded funds (ETFs) and exchange-traded notes (ETNs) which can give you various kinds of exposure to commodities. Before investing, you should look carefully at the composition of the fund or note and decide if it is right for you.

Popular agriculture ETFs include the PowerShares DB Agriculture (AMEX: DBA); iPath AIG Agriculture (NYSE: JJA); iPath AIG Grains (NYSE: JJG); and the iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG).

But the standout in this group so far this year is the PowerShares DB Commodity Index Tracking Fund (AMEX: DBC), "a rules-based index composed of futures contracts on six of the most heavily-traded and important physical commodities in the world - crude oil, heating oil, gold, aluminum, corn and wheat."

If you’re looking for a way to capitalize on the huge increases in commodity prices, but you don’t want to be a futures trader (and I’m guessing that’s all of you), DBC is a great way to go. My colleague Steve Christ discussed DBC last week.

Several other ETFs and ETNs focused on metals have been strong performers this year, including the iPath Dow Jones-AIG Copper ETN (NYSE: JJC), up 28% this year; the iShares Silver Trust (AMEX: SLV), up 19%; and the PowerShares DB Silver Fund (AMEX: DBS), up 18%.

Commodities Buck the Trend

While the indexes have all gotten crushed this year (Dow: -7%, NASDAQ: -14%, S&P: -10%), the commodity plays have been going gangbusters.

Just take a look at how some of the better performers have done since the big selloff bottomed on Jan 22 of this year:

And consider this: since 2005, U.S. stock prices have gained a mere 10% overall.

Over the same period of time, Mosaic has gained 665%! And it’s not done yet, not by a long shot. It recently reported a tenfold increase in profit on its third quarter, it hit a new 52-week high today, and it was recently given a price target of $153 by Citi Investment Research, which means it should gain another 21%.

Commodity ETFs and good quality, diversified commodity stocks should continue to be an excellent way to recession-proof your portfolio, and dampen the pain of the higher prices you’re paying for food and fuel.

In a skittish bear market like this, friends, that’s the performance you’re looking for!

Until next time,

–Chris