PowerShares DB Agriculture (DBA – AMEX)

Dear Bottarelli Research Member,

This week we’re going to take a step away from a true small-cap stock and jump into a position geared towards future increases in food, grains, and other various commodities.

The global need for soybeans, corn, and rice – combined with shorter planting times in the U.S. (due to extremely wet weather) – all point to higher food costs in the foreseeable future. This is a worldwide story that’s just now in the early stages, and I believe it’ll only gain more and more attention on a global scale in the coming years. Just this week, for example, there was intense fighting in Haiti over rice supplies. And on that same topic, Vietnam (which is a major exporter of rice in the Pacific Rim) is threatening to hold back on their rice shipments so they can feed their own population. The Associated Press even picked up on this story with their April 14^th article titled, “Food Costs Rising Fastest in 17 Years.” As investors, we need to formulate a strategy to profit off the growing demand for commodities and food sources, and this leads directly into this week’s newest pick.

The investment Bryan and I are offering you today is one that we hoped would have pulled back, thanks (in part) to a Barron’s cover story that argued that speculators may be pulling out of commodities. If these speculators are in fact pulling out, Barron’s argued, then commodity prices could fall around 30%. Well, that was two weeks ago, and folks, this is simply not happening.

I must tell you, I follow the gains and futures markets closely, and I have never seen upward price movements like this in my entire life. In fact, I was raised in the Midwest farm country, and I still keep in touch with many of the top growers in that region. When I call them to discuss the upcoming planting season, many are reporting that the extended winter and extremely wet conditions are making it impossible to plant any crop. Therefore, you can expect significant time delays in the upcoming growing season, and unless we receive absolutely perfect summer conditions, we’ll have a big dilemma on our hands. This is a flashing warning signal and – trust me – the concern is very real.

That’s why I firmly believe that this week’s pick should be a core holding in your investment ledger. I believe that we’re only the second leg of a global commodity boom, and therefore, this new investment opportunity will line your pockets with sizeable profits as commodity prices continue to advance higher.

Today’s investment recommendation is the DB Agricultural Fund (DBA – AMEX), and it offers you a wonderful way to play the entire “soft” commodity market all in one diversified collection of managed futures contracts. Take one look at the DBA chart (shown in Bryan’s write-up) and the investment thesis will be perfectly clear. In fact, if we’re lucky enough to get another pullback, we will certainly be adding to this position, as it does not stay down for long. But first thing’s first: let’s establish a new position in DBA right now!

UPDATES

Gran Tierra Energy (GTE – AMEX): Make note of the symbol change, as Gran Tierra Energy has changed its symbol to GTE and now trades on the AMEX. I fully expect this gem to become a major friend to our portfolio, and that’s why I feel GTE should be a core small-cap holding. With oil and gas exploration operations advancing in Colombia, Peru, and Argentina, the future looks extremely bright. Make sure to review our original buy alert on GTE dated Friday, March 14^th 2008. The new energy bill, combined with talks of opening up increased trading with Columbia, Peru, and Argentina is playing right into our hands. Hold/Buy on pullbacks.

US Geothermal (HTM – AMEX): Please make a note that US Geothermal, which formerly traded under the symbol of UGTH, has now joined the AMEX and shares trade under the symbol HTM. Boy oh boy, I absolutely love when one of our small-cap companies moves from the bulletin board over to the AMEX or NASDAQ. That’s a true sign that the company is emerging as one of the top growth leaders in their field. In fact, HTM just acquired a 3.6-megawatt geothermal power plant with approximately 28,358 acres (44.3 square miles) of geothermal energy leases (plus ground water rights) north of Reno, Nevada. As I mentioned earlier, with oil moving drastically higher, the top geothermal plays are really going to “pick up steam” (sorry for the pun, but I just couldn’t help myself). We doubled our money with US Geothermal last year, and I fully expect to see it double again this year too. If you don’t own HTM, buy it now. I think shares could hit $6.00 by year’s end. Buy.

Huaneng Power International (HNP – NYSE): We just recommended HNP two weeks ago, and I would use this recent dip as your friend. Remember, the demand for power in China is not going away anytime soon, and HNP is working on many different power generation formats. Combine that with a nice dividend, and we fully expect the price of HNP to appreciate as the year continues. Buy.

Accuray Incorporated (ARAY – NASDAQ): The CyberKnife developer has pulled back, giving anyone who would like to own this gem a great opportunity to do so. Just recently, Alliance Radiosurgery purchased six (6) facilities operating the CyberKnife Robotic Radiosurgery System in California, Maryland, New Jersey, and Tennessee. And last week, the Hirslanden Clinic in Zurich (which is part of the renowned Hirslanden group of private hospitals) also purchased a CyberKnife System. Their technology is certainly catching on around the globe, and their sales remain on track. Therefore, use this dip as your friend. The ARAY share price will soon begin to truly reflect this company’s upside potential.

Minera Andes (MNEAF.OB): This little gem is a pure play on copper, and they’re rapidly expanding both their drill targets and the amount of ore they’re currently producing. I would use any weakness to add to your position, or buy shares if you haven’t already done so. By year’s end, I think this stock will be much higher. Buy.

On that note, I’ll turn things over to Bryan. Have a great week, and be sure to give thanks for the abundance in your life.

Sincerely,

“The number of acres devoted to wheat farming has been declining for more than 30 years. Food inventories are the lowest they’ve been in 60 years.”

- Jim Rogers, quoted in Barron’s April 14^th 2008

“God knows how high the price of agriculture is going to go, so that’s where I’m putting more of my money now. I think I’m going to make more money in agriculture than I made in precious metals.”

- Jim Rogers, October 2007

Unless you’re a seasoned grain trader on the Chicago Board of Trade, it’s very difficult to play the “pure” movements of commodities like corn, wheat, soybeans, etc.

That’s why PowerShares DB Agriculture (DBA – AMEX) is such a remarkable investment vehicle.

The DBA tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – a non-diversified index of futures contracts on the most liquid and widely-traded agricultural commodities (like corn, wheat, soy beans, and sugar). Over the last year, this collection of futures contracts has gained 46.76%. And since the calendar moved over to 2008, this same collection of futures contracts has gained 10.49% – widely beating the losses suffered by the major market averages.

As it stands today, the top holdings of the DBA consist of the following:

• Wheat Futures July 2008
• Wheat Futures December 2008
• Corn Future July 2008
• Red Wheat Futures July 2008
• Soybean Future January 2009
• Sugar Futures N/A

When you review the 2008 returns of these “soft” commodities, this alone is enough to justify an immediate investment in the DBA. But before going any further, let’s back up a moment and review the entire investment thesis of commodities. And for that, we’ll start off with a discussion of the most predominant commodity bull of all, Jim Rogers.

As you probably know, Jim Rogers co-founded the Quantum Fund with George Soros in 1969. And between 1970 and 1980, their fund returned an incredible 4,200%.As you can guess, this outperformed the S&P 500 by an enormous margin and made Mr. Rogers a multimillionaire.

After this incredible run, Jim “retired” at age 37 and began to travel the world. In the process, he wrote two books documenting his travels – the first via motorcycle and the second via a custom-made Mercedes S series – titled Investment Biker and Adventure Capitalist. Based upon these travel experiences, Jim Rogers officially became bullish on commodities. In 1998, he launched his own proprietary commodity index called the Rogers International Commodities Index which has gained nearly 400% since inception. Contrast that 400% gain to the S&P 500’s 18% gain over the same time horizon, and Jim Rogers is once again on the leading edge of the best investing trends available in the world today.

Truth be told, most of the 400% gain that Jim achieved came from hard commodities like oil, gold, aluminum, copper, and nickel. After all, every one of them has tripled in the last five years. But on the other hand, soft commodities, like wheat, corn, and soybeans remain at historic lows relative to their hard counterparts.

That’s where we find today’s opportunity…

You see, Mark and I both feel that soft commodities will be the ones that experience the next major price increase. And it’s easy to see why. In 1960, one barrel of oil traded for the same price as one bushel of wheat or corn. Today, oil is at $100 while wheat is at $10 and corn is at $5.46. Amazing.

As you can see, if agricultural commodities tripled in price and oil moved back down to $60.00 a barrel, we still wouldn’t be anywhere close to the historic relationship of hard versus soft commodities.

But that’s just the tip of the iceberg. From 1974 to 2005, the world’s population grew by more than 1.1 billion people. Despite an additional 1 billion mouths to feed, most countries haven’t increased their available farmland. In 1989, for example, the total worldwide arable land was 1.6 billion acres. And today, nearly 19 years later, we’re still stuck with the same 1.6 billion acres. How can we produce more food without any more land on which to grow it?

The story continues…

In addition to the population growing without any farmland increase, the world is also eating a more Western diet. In 1985, for example, the average Chinese consumer ate 44 pounds of meat per year. But today, the average Chinese consumer eats more than 110 pounds of meat per year. That’s nearly double. Since it takes 17 pounds of grain to generate one pound of beef, and since China has 20% of the world’s booming population, it’s clear where this trend is headed.

What’s more, inventories for corn, wheat, and soybean are near 40-year lows. And other soft commodities (like cotton, sugar, and coffee) are at historically low inventories as well. And it that weren’t enough, Congress has now committed one third of all U.S. corn production to go towards ethanol.

Simply put, food prices are not going down anytime soon.

Case in point, just look at the price increases of basic food items from Q4 2007 to Q1 2008 and you’ll clearly see that the time to buy is now.

When you see a list like this, the argument becomes as simple as you can get.

The facts are unmistakable.

And I don’t even need to bring up the issue that half of the world seems to be suffering from droughts (due to global warming?) while the other half of the world is dealing with the opposite problem – floods and typhoons. As Mark mentioned above, excessive rain is already delaying corn planting here in the U.S.

So what you have is consumption that is increasing, supply that is decreasing, and stockpiles are at all-time lows. And don’t forget about oil. High oil prices translates into higher transportation and fertilizer costs, and this only adds fuel to the fire. In fact, there is only one response to this, and it is that food prices will increase — everywhere.

It’s already happening, in fact. Records at the United Nations show that global food prices have increased 35% in the past year, with grain up 42% and dairy up an amazing 80% (and you’ve already seen the individual food price increases from just one quarter above). Some experts are already calling this “food inflation,” and that’s why it’s imperative that we have some investment exposure in agricultural commodities. This will be one of the biggest trends of the next two to three years, and that’s why fertilizer companies like Mosiac (MOS – NYSE), Potash (POT – NYSE), and Agrium (AGU – NYSE) have absolutely been on fire.

But as Mark alluded to above, the world’s poorest countries are facing very real fears of food shortages, and even the not-so-poor (like Saudi Arabia, of all places!) are acting to ensure food supplies and curb food inflation. Here’s just a sampling:

• Saudi Arabia cut import taxes on common foodstuffs such as vegetable oils, dairy products, and poultry.
• India removed tariffs on corn and banned the export of all rice. Over the past two years, they’ve also increased their strategic grain stockpiles to protect against shortages.
• Vietnam (the world’s third-largest rice producer) is planning to cut its rice exports by 11% in an attempt to ensure its own “food security.”
• Indonesia has reduced import tariffs on foodstuffs as a check on ag-flation.
• Bangladesh banned the export of soybean and palm oils for six months last month.
• The Philippines are cracking down on rice hoarders (which are those seeking to profit off tight supplies) by threatening a lifetime prison sentence.

Put it all together, and the investment thesis going forward is quite simple. Food prices will continue to increase, and that makes a bullish argument for soft commodities like never before. 25,000 people die each and every day from hunger, yet wheat and corn remain an afterthought to oil and gold prices.

As this problem gets worse, smart investors must be prepared to profit, and the PowerShares DB Agriculture (DBA – AMEX) is the very best way for individual investors like you and me to profit off this unmistakable trend. Therefore, the time to get positioned it now!

PLAY: Buy shares of the PowerShares DB Agriculture (DBA – AMEX) at or under $40.00, good for the week.

Sincerely,