Tracking an index that offers roughly equal exposure to corn, wheat and soybeans, iPath Dow Jones-UBS Grains Total Return languished early in 2010 amid high supplies of wheat and corn. Farmers also increased soybean acreage to take advantage of higher prices. These factors led to flat or falling prices for all three grains.

However, drought and wildfires decimated the bread basket regions of Russia, Central Europe and Asia in 2010. Unusually dry weather in Australia earlier last year also damaged crops. Canada encountered the opposite problem as wet weather caused seed to rot and increased blight.

As a result grain prices advanced across the board, pushing iPath Dow Jones-UBS Grains Total Return up by more than 33 percent. Unfortunately, shares of General Mills have gained a little more than 5 percent since then and hedges have muted the impact of higher prices.

The natural disasters that ravaged crops in 2010 have hopefully run their course. But is there any upside left for grain prices?

Grain prices have room to climb, and our government will be largely responsible for this outcome.

According to data from the United Nations, global food inflation hit an all-time high in December, a fact that American consumers will recognize from any trip to the supermarket.

Global food supplies are stretched thin as the world copes with a growing population that’s also enjoying greater wealth. Nonetheless, the US has devoted an ever-growing portion of its corn crop to ethanol production. The government touts ethanol as a means to reduce auto emissions–ethanol burns more cleanly that gasoline. But higher levels of ethanol production impact our nation’s corn supply. According to data recently released by the US Dept of Agriculture (USDA), almost 40 percent of US corn last year was used in the production of ethanol, up from less than 7 percent a decade earlier. That’s a significant shift when one considers that the US produces 39 percent of the global corn supply.

Tightening supplies of corn elevates prices for all foodstuffs. The prices of corn-based cereals rise with elevated input prices. Beef and other meats become more costly in the face of rising feed costs. Even the price of soft drinks and soda can rise due to higher costs for high-fructose corn syrup. Interfering with the corn supply also results in rising prices for a number of other crops.

Nonetheless, a greater portion of our country’s corn harvest is slated for ethanol production; the government has raised the amount of ethanol that can be blended with gasoline to 15 percent from 10 percent. As a result, next year’s USDA data could reveal that half of the corn grown in the US went to ethanol production.

Let’s set aside the arguments for and against blending ethanol and gasoline. As investors we must accept the new reality and hunt for profits. IPath Dow Jones-UBS Grains Total Return continues to be an attractive long-term play on higher grain prices.

Dinner and a Show

It’s never too late to plan a midwinter trip to sunny Florida. Join Elliott Gue, Roger Conrad, Benjamin Shepherd and David Dittman at this year’s World MoneyShow Orlando, Feb. 9-12, 2011, at The Gaylord Palms Hotel & Convention Center.

This annual event attracts more than 9,000 investors seeking insights into the new year’s most profitable trends. Looking for a more personal experience with energy expert Elliott Gue? Make reservations for dinner and a show.

Elliott, Roger, Benjamin and David will host a sumptuous dinner on Feb. 10 for a select number of subscribers at The Gaylord Palms Hotel’s Old Hickory Steakhouse, providing plenty of opportunity for profitable one-on-one discussions about the market and investing. Reservations are $299. To book your place at the table, call Customer Service at 1-800-832-2330 and ask for Special Offer O01595.

To register free for the World MoneyShow Orlando, visit www.MoneyShow.com or call 800-970-4355 and mention Priority Code 020815.

What’s New

No new exchange-traded products were launched last week.

Portfolio Roundup

• As of Jan. 5, 2010, Van Eck has changed the name of Market Vectors Nuclear Energy (NYSE: NLR) to Market Vectors Uranium + Nuclear Energy to reflect the fund’s heavy weighting toward uranium miners. The fund should receive a boost from President Obama’s State of the Union speech that cited nuclear energy as a critical part of the US energy mix.
• iShares Dow Jones US Oil Equipment Index (NYSE: IEZ) may come under pressure after the President called for an end to subsidies for oil companies. According to the Congressional Budget Office, tax breaks for the oil industry amount to about $4 billion in savings for the industry. Most of those savings are applied to drilling activities and an end to subsidies would lead to a slowdown in drilling until oil prices move higher. Less drilling activity could crimp margins at equipment firms.