CEA Portfolio Update – April 2015

| April 28, 2015

Brazilian Shortfall Ready To Send Coffee Higher?

As you know, I sent out an email on April 2nd, alerting you to the buying opportunity in the iPath Bloomberg Coffee Subindex Total Return ETN $JO.

Here’s additional insight into why we made this trade, and how it’s performing thus far.

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As I mentioned in the trade alert earlier this month, a number of factors are converging that will likely lead to higher coffee prices in the near future.

Here’s what we know…

First of all, a number of commodity analysis firms are projecting another relatively weak harvest for Brazil, the world’s top coffee producer.

Production estimates vary, but the average projection sees Brazil producing around 44 million bags in 2015.

That’s an 8% downturn from last year’s estimated 48 million bag harvest.

However, some see this year’s crop dropping as low as 40 million bags, which would be a stunning 16% drop from last year.

Who sees production dropping so drastically?

None other than Brazil’s National Coffee Council…

The council, which represents Brazilian coffee cooperatives, says the extended drought in early 2014, along with dryness in early January 2015, are having a collective detrimental effect on delicate coffee trees.

What’s more, the National Coffee Council reports Brazil producers are sitting on their smallest coffee inventories in the past ten years due to the weaker than normal 2014 harvest.

The culmination of these two factors bodes poorly for Brazil’s crop, along with global coffee supply.

In fact, some analysts see a global supply deficit for the commodity should Brazil’s 2015 harvest come in as weak as the National Coffee Council predicts.

Clearly, with the world’s top coffee producer on the ropes, the burden falls on other nations to take up the slack.

But there’s a problem…

Vietnam, which is world’s second largest producer, is expected to decrease exports in coming months as growers are reluctant to sell their commodity at such low prices.

Speaking of low prices, coffee is trading in a tight, range-bound pattern in the $1.40 a pound area- just a stone’s throw away from the early 2014 low of $1.15.

Take a look…

coffee

From a technical perspective, there’s really nothing to get excited about with coffee just yet.  The commodity has yet to see the strong bullish price action needed to lift it out of this trading range (green lines).

However, given the bullish supply estimates we have from multiple sources, coffee is very likely near an intermediate term low.

Once the commodity breaks above $1.47 on strong volume, we’ll likely see investors with remaining short positions exit the market.

In such a scenario, a rally to the $1.70 area is likely.   

Of course, this price target complies with our $30.00 price target in $JO.

With $JO currently trading at $23.62, you still have a great opportunity to pick up the coffee ETN at a fair price.

If you haven’t done so already, add $JO to your commodity portfolio at any price up to $24.93.

Keep in mind, despite all this bullish talk, we’re keeping our risk control price at $22.40 in $JO.  Should coffee pull a fast one and drop underneath the early March low, we’ll want to close this position to conserve capital.

Bottom line…

Poor Brazilian supply fundamentals, mixed with weakening Vietnamese exports, bode well for a coffee rally!

 

Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $10.26 $9.43 +8.8%
Grains JJG $33.62 $36.36 -7.5%
Industrial Metals JJM $26.60 $27.11 -1.9%
Precious Metals JJP $56.94 $56.77 +0.3%
Softs JJS $35.33 $33.77 +4.6%
Livestock COW $27.28 $26.75 +2.0%
ALL COMMODITIES DJP $28.91 $28.52 +1.4%
As of 04/27/15

 

Energy Commodities

An uptick in Middle East political uncertainty sent WTI crude rallying to new 2015 highs in recent trading.  Of course, the crude rally stopped us out of our position in the US Short Oil Fund $DNO.

As you may remember, we raised our $DNO stop loss order to breakeven at $58.94 in last month’s update.  As a result, our $DNO trade is officially closed.

But bad news for $DNO is great for our position in the Energy Select Sector SPDR $XLE…

$XLE rallied to new 2015 highs at $83 a share on April 16th Let’s keep holding $XLE for higher prices as it’s highly likely the price of oil has bottomed.

What brings me to that conclusion?

Data from the US Energy Information Administration (EIA) suggest US oil production is ready to start turning lower.  In fact, crude oil output is already 66,000 barrels per day lower than the peak reached in late March.

Once the production downturn starts accelerating, which it most certainly will, the price of WTI will likely rise into the $60 range.

What about natural gas?

As of last night’s close, the gaseous commodity was trading at $2.50 mmBtu.  Given recent EIA inventory data, it’s likely natural gas breaks to new 2015 lows in the very near future.

In fact, it’s not out of the question to see natural gas test the early 2012 low near $2.00 by June.

 

Grain Commodities

Bad news for grain bulls…

The US Department of Agriculture (USDA) reported their highly anticipated prospective plantings report on March 31.  Investors found that farmers are expected to plant 89.2 million acres of corn this year, which is 2% lower than last year.

However, the government agency also reported that corn inventories totaled 7.74 billion bushels, which is up 11% from the same time last year.

That’s not what corn bulls want to hear!

Despite farmers planting less corn than last year, the USDA says there’s still plenty of the commodity to go around.

In response to the report, the price of corn is falling towards the late 2014 low at $3.50 a bushel.

What do we do with our position in the Teucrium Commodity Trust Corn Fund $CORN?

As of last night’s close, $CORN was trading at $23.50, which is $0.20 below our entry price from last October.   Given the bearish news from the USDA, I suggest you close this trade at your soonest convenience. 

I firmly believe we’ll get another chance to buy corn at even lower prices in coming months.

 

Industrial Metals 

Since rallying to $2.90 a pound in mid-March, copper prices have slowly bled back to the $2.75 area.

But here’s the deal…

In order to combat stagnant growth, the People’s Bank of China (PBOC) recently unveiled a hefty stimulus program.  The Chinese central bank lowered the reserve requirement ratio by 100 basis points last week, which released around $200 billion of liquidity into the Chinese economy.

Since China is the largest consumer of copper in the world, the stimulus has the potential to really kick start demand.

However, we need to see proof the stimulus is working before entering the copper market.  After all, the PBOC has stimulated their economy with similar measures four times since November 2014 – none of which have had the desired effect.

Be patient with copper.  An entry into this market may be coming soon!

 

Precious Metals

Gold has been nothing but a choppy mess the past few weeks.  The yellow metal is trading in a tight range around $1,200 an ounce as investors search for clues to metal’s next big move.

The same ambivalent price action can be seen in silver, platinum, and palladium.

When can we expect some excitement in these markets?

Don’t hold your breath…

Until the US Dollar turns sharply lower and/or inflation starts showing up in the US economy, there’s little reason to believe a big bullish move is coming in the precious metals space.

 

Softs

Along with coffee, sugar is also showing signs of a possible bullish reversal.  With the commodity approaching the 2010 low of 10 cents a pound, I’m starting to see some short covering.  What’s more, sugar failed to put in a new low on April 22nd, which is a good sign bears are losing control of the market.

And let’s not forget about cocoa…

The highly volatile commodity is once again making a bullish run for the $3,000 a ton level.  As you may remember, cocoa has rallied to this price area twice this year.  However, both times the commodity was met with heavy selling.

But this time may be different…

Analysts are increasingly concerned that top cocoa producing nations, Ivory Coast and Ghana, will be unable to produce enough of the commodity to meet global demand this crop season.


Livestock

After selling off to the $1.95 a pound level in February and March, feeder cattle is back on the road to higher prices.  The commodity jumped to $2.20 in early April as investors factored in the high likelihood of another high demand summer grilling season.

What’s more, recent feedlot number readings reveal supply could once again grow very tight in 2015.  That’s because ranchers are still struggling to reverse a long-standing bearish trend of smaller cattle herds.

As I’ve said many times in the past, rebuilding the US cattle herds will take many years, which will likely keep cattle prices elevated for quite some time.

 

Category: Commodity Trading