CEA Portfolio Update – November 2015

| November 24, 2015

El Niño Has Come To Play Hardball…

As you know, I sent out an email on November 13th, alerting you to the buying opportunity in the iPath Bloomberg Cocoa ETN $NIB.

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

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As long time subscribers to this service are fully aware, weather disruptions can have a big impact on crop prices.

Here’s the perfect example…

Look back to early 2014 when the price of coffee rocketed from $1.10 a pound to just over $2.00 in a matter of months.

At the time, a lack of Brazilian rains during a pivotal growing period raised fears of a global coffee shortfall.

A well-timed investment in a coffee focused ETF netted Commodity ETF Alert readers 45% gains in early 2014.

A similar situation is developing as we speak…

In case you haven’t heard, one of the strongest El Niños ever recorded is developing the Pacific Ocean.

What exactly is an El Niño?

The peculiar and still unexplained ocean phenomenon occurs when equatorial surface waters in the Eastern Pacific Ocean warm above their long-term average.

But what’s really amazing is this simple rise in ocean temperature alters weather patterns the world over.

Some regions of the globe get much more rainfall, while others receive substantially less.

One of the areas that tends to get hit hard is Western Africa…

Previous El Niño patterns brought extensive dryness to the region.

And since West Africa is home to the world’s largest cocoa producing countries (Ghana, Ivory Coast and Nigeria), there’s growing worry a large percentage of these sensitive crops will see production declines.

Fact is, the International Cocoa Organization (ICCO) is forecasting a global deficit of 96,000 tons in the 2015/16 harvest season.  That outlook is partly due to the fact Ghana just had the driest July-September in nearly 30 years.

Remember, West Africa is home to 70% of global cocoa production.  So it goes with saying the region’s weather is closely watched by cocoa industry professionals.

Speaking of which…

Singapore-based Olam International just one-upped the ICCO with a 150,000 ton global deficit outlook for the upcoming crop season.

Olam, which has one of the world’s largest cocoa bean trading desks, cites a weaker-than-expected Ghana harvest in the 2014/15 season.   By their estimate, last season’s Ghana crop was down to 750,000 tons, a near 20% decline from the previous year.

If this year’s El Niño is as bad as many think it will be, cocoa production in Ghana will likely take another big hit.

Clearly, there are some serious supply concerns in the cocoa market.

What about demand?

According to the ICCO, the ending stocks to grinding ratio is getting tighter with each passing year.   In case you’re unaware, grinding is a measure of demand in the cocoa market- higher grinding data equates to more demand.

Since 2011, this important ratio has declined from 44.3 to 35.5, which signifies a tightening global market.

Clearly, cocoa is well positioned for price gains in coming months.

As you know, we recently established a long position in the iPath Bloomberg Cocoa ETN $NIB with these fundamental factors in mind.

But I’d also like to point out a few technical factors…

cocoa prices

As you can see, cocoa recently broke above an important resistance trend line (green line).  This breakout, mixed with the fundamental factors above, increases the likelihood of additional cocoa upside in coming months.

But let’s be clear…

I am not expecting a smooth ride to higher prices.  In fact, I wouldn’t be surprised to see increasing volatility in cocoa as investors factor in newly arriving production data.

As you know, we have a risk control price of $39.09 in $NIB (or 10% from your entry).  While it’s unlikely our cocoa tracking ETF drops to that point, risk control should always be your first priority in trading.  As a result, keep that important price level in mind.

Here’s the bottom line…

A worrisome El Niño weather outlook, mixed with an already tight cocoa market, has the potential to push $NIB higher in coming months.  What’s more, a promising technical breakout from a multi-month consolidation could add even more fuel to the fire!

 

Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $6.64 $7.20 -7.8%
Grains JJG $31.14 $32.89 -5.3%
Industrial Metals JJM $18.64 $20.88 -10.7%
Precious Metals JJP $49.19 $54.40 -9.6%
Softs JJS $33.73 $32.72 +3.1%
Livestock COW $23.06 $25.69 -10.2%
ALL COMMODITIES DJP $22.60 $24.14 -6.4%
As of 11/24/15

 

Energy Commodities

WTI crude is testing the $40 a barrel mark once again…

Abundant US inventories, mixed with questionable global economic growth, have many analysts suggesting another drop into the $30 range is right around the corner.

Clearly, the idea this commodity is at or near a long-term bottom has yet to gain credence.

But just when you thought bears really had the upper hand, something happens in the Middle East…

As you may have heard, a Russian warplane was shot down over Syria last night.  As a result, WTI is up by a hefty 3% in today’s trading session.  While it’s impossible to know how this tense situation will play out, investors aren’t wasting any time applying a risk premium to crude.

For now, it’s best to remain on the sidelines in the oil market.

What about natural gas?

Thanks to an unseasonably warm October and November in the Eastern US, the commodity is careening towards long-term technical support at $2.00 mmBtu.

Quite simply, the lack of cold weather, along with resilient production, has the US natural gas market woefully oversupplied going into the winter.  In fact, recent EIA inventory reports reveal there’s a record amount of gas in storage right now- 4,000 bcf.

But here’s the deal…

The $2.00 mmBtu price level is very important since it is the multi-year low set in 2012.  As a result, we’ll likely see some short covering in natural gas soon.

However, since the supply/demand fundamentals are strongly in favor of the bears, it’s best to stick to the sidelines in this commodity.

 

Grain Commodities

A recent WASDE report sent corn into a tailspin.  According to the USDA’s November 10th report, the US corn harvest came in much better than expected this year.

Here are a few quick details…

The US corn yield was raised to 169.3 bushels per acre (bpa), which is solid advance over the 168 bpa reported in October. Thanks to the yield increase, US corn production is estimated at 13.6 billion bushels.

But here’s what’s really surprising…

The USDA reported a massive increase to 2015/16 global corn stocks.  Carryout was increased by 948 million bushels versus a month ago.  Much of the upturn comes from surging Chinese inventories.

Bottom line…

Even though corn is relatively cheap at the moment, abundant global inventories will likely keep the grain subdued for the foreseeable future.

 

Industrial Metals

Copper succumbed to a steep selloff in November…

The red metal plunged towards $2.00 a pound in recent trading as investors priced in another round of weak Chinese economic data.  As you know, the copper market has been fighting poor China growth readings for the better part of a year now.

Is it finally time to purchase copper on a value proposition?

No…

While the metal is inexpensive compared to where it was trading a few years ago ($4 a pound), there’s simply no fundamental reason to get long right now.

Unless the dollar reverses lower and/or the Chinese economy suddenly returns to GDP growth north of 8%, copper will likely stay under bearish control.

Given the current headwinds, a drop to the 2009 low near $1.50 isn’t out of the question!

 

Precious Metals

No doubt about it, the October 27th Federal Reserve meeting results brought precious metal bears roaring to the forefront.

Case in point, gold has plunged nearly $100 an ounce (8%) the past month thanks to a surprisingly hawkish outlook from the US central bank.

According to Fed Chairman Janet Yellen, the US labor market is now strong enough to support an interest rate raise.  Thanks to the Fed’s October guidance, economists are putting the odds of a December 2015 rate raise at 70%.

Listen closely…

The abrupt November price downturn has essentially ruined any chances of a gold breakout in 2015.

Given the current fundamental and technical situation, the odds of the yellow metal dropping to $1,000 an ounce or lower in 2016 are rapidly increasing.

 

Softs

With climate scientists now certain this year’s El Niño will be one of the strongest ever recorded, certain soft commodities are prone to abrupt rallies.

Of course, we discussed cocoa above.  But global coffee and sugar crops are also at risk of El Niño related supply disruptions.

I’ll be keeping a close eye on this situation in coming months.  If another opportunity presents itself, you’ll be the first to know!

 

Livestock

Live and feeder cattle markets are seeing some rather remarkable volatility the past two months.  Both markets jumped sharply in early October after a swift September downturn.

But November brought the bears right back out again…

Live cattle are down 9% on the month while feeders are off by 8.8%.  This substantial increase in trading volatility is likely due to the fact investors are becoming less certain the multi-year uptrend in cattle price is sustainable.

As we’ve talked about many times in the past, cattle have been under immense bullish pressure (no pun intended) since 2013.  But with both live and feeders trading at all-time highs for the past year, there’s growing risk of an abrupt correction.

 

Category: Commodity Trading