Commodity ETF Alert January 2014 Portfolio Update

| January 28, 2014

 

COFFEE:  TOO CHEAP TO IGNORE…

As you know, I sent out an email on January 14th, alerting you to the long-term buying opportunity in the iPath Pure Beta Coffee ETN (CAFE).

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

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Finally. After three years of steeply declining prices, the global coffee market is at a major turning point.

Let me explain…

As I mentioned in our trade alert a few weeks ago, coffee recently hit its lowest price level in five years.

That’s right, the commodity traded at $1.01a pound in November… 66% lower than prices seen in mid-2011.

Why such a severe downturn in recent years?

With coffee surging to $3 a pound in 2011, producers went on a planting binge.  The world’s largest growers, Brazil, Vietnam, and Indonesia, were dead set on making a windfall.

Mix that with an exceptional run of near perfect growing and harvest weather, and global supplies of the commodity surged.

But it was too much…

The global market became saturated thanks to the zealous efforts of growers.  As a result, the price of coffee succumbed to a brutal and unforgiving downtrend for the past three years.

But now, investors are seeing a light at the end of the tunnel…

Numerous fundamental factors are now swinging in favor of the bulls.

First of all, at $1.00 a pound coffee production is largely unprofitable for most growers.  Even in the world’s most efficient growing regions, producers are selling coffee at a loss.

The situation has become so dire that growers in Brazil and Vietnam recently withheld deliveries in hopes of propping up prices.

As you may know, below cost of production situations like this can only last so long. Once producers cut back on their growing efforts, supplies eventually dwindle to the point where demand overtakes supply.

Speaking of demand…

When looking at the multi-year downturn in prices, one might think coffee demand has gone cold.

Not so.

Coffee is the one of the most widely consumed drinks in the world.  And with each passing year, global demand for the commodity rises.  In fact, consumers are expected to indulge in 141.9 million bags of coffee this year, up from 141.6 million bags in 2013.

And here’s where the bullish case for coffee really comes together…

When coffee fell to $1.00 a pound a few months ago, investors were certain the market would be overwhelmed with supply- just like it has been for the past two years.  After all, Brazil was expected to produce another bumper crop of 60 million bags in the 2013/14-harvest season.

But the most recent data points to Brazil falling short of these lofty expectations…

As a matter of fact, industry experts are cutting Brazilian production forecasts to around 51 million bags- a 15% decline from estimates released in November.

Why?

It turns out that many Brazilian coffee growers are witnessing poor flowering on their trees.  After two years of record production, trees in many parts of the country are stressed.

What’s more, thanks to the severe decline in prices, many Brazilian growers are choosing to prune their trees instead of having them produce.  Of course, pruning takes the tree out of production for the year.

And that’s not all…

Damaging rains hit the heart of Brazil’s coffee belt in December.  According to Somar Meteorologia, the country just encountered the strongest December rainfall in 90 years.  Thanks to the deluge, as much as 40% of the country’s coffee crop may have been damaged.

Bottom line…

Brazil likely won’t produce nearly as much coffee as investors thought just a few months ago.  Thanks to the sudden production downturn, a surprise global coffee deficit may be brewing in 2014.

As a matter of fact, analysts at Volcafe are pegging global production to be five million bags short of demand.

If this turns out to be the case, we’re likely witnessing a multi-year bottom in coffee futures right now!

If you haven’t already, go ahead and establish a position in the iPath Pure Beta Coffee ETN (CAFE) at any price under $15.83.  As coffee prices rise, so will CAFE.

 

COMMODITY REVIEW

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $18.33 $18.55    -1.2%
Grains JJG $42.86 $44.22    -3.1%
Industrial Metals JJM $28.66 $29.15    -1.7%
Precious Metals JJP $62.60 $60.61    +3.3%
Softs JJS $41.20 $43.44    -5.2%
Livestock COW $28.38 $27.14    +4.6%
All Commodities DJP $36.67 $37.34    -1.8%

 

ENERGY COMMODITIES

Another wild month for the energy markets!

First of all, natural gas surged to a new multi-year high of $5.25 mmBtu over the past few days.  As you may know firsthand, the recent bullish run is due to the ongoing bout of frigid temperatures enveloping the Eastern and Midwestern US.

Weather experts say this is the coldest January the US has seen in over a century!

Thanks to all the bitter temperatures, natural gas demand is shooting to record levels. In fact, two of the highest EIA weekly withdrawal readings in history happened within the past two months.

But here’s the deal…

With natural gas already trading near multi-year highs at $5.00 mmBtu, upside potential for the commodity is limited.  Temperatures would have to stay remarkably cold for the next two months in order for gas to stay at this elevated level.

As a result, now’s the perfect time to exit our position in the US 12-month Natural Gas (UNL).  Go ahead and sell UNL as soon as possible.

As far as oil goes…

The International Energy Agency (IEA) upgraded their global demand outlook a few days ago.  According to the highly respected agency, developing economies are strengthening and will help increase crude demand by 1.4% in 2014.  That’s up from 0.2% growth in 2013 and a downturn of 1.1% in 2012.

WTI crude responded to the news by jumping to $97.84 in last week’s trading session.

But let’s not give up on our trade in the US Short Oil Fund (DNO) just yet…

The US is hitting new multi-decade highs for oil production with each passing month. What’s more, the uptick in global growth fears we’ve witnessed over the past few days will likely leak into the oil market soon.

Put it all together and WTI will likely fall below $90 a barrel in 2014.

GRAIN COMMODITIES

Unfortunately, the grain markets aren’t doing much of anything right now.  Corn is stuck around $4.30 a bushel while soybeans and wheat are trading at $12.85 and $5.66 a bushel respectively.

But corn will likely start seeing some bullish interest soon…

According to analysis by Morgan Stanley, ethanol demand is expected to jump by 8% this year.  What’s more, the relatively low price of corn has global buyers lining up to shore up inventories.

As a result, corn is poised to rise out of the recent choppy trading pattern in the near future.

As far as soybeans and wheat goes…

The most recent fundamental data from the USDA was mixed.  In other words, neither bulls nor bears currently have a definitive edge in these markets.  As a result, we may see a few more weeks of choppy and indecisive trading.

However, in the long run, both wheat and soybeans are set to rise from their current oversold status.  Demand for these grains can only rise as global population swells.

If you haven’t already, buy the Teucrium Corn Fund (CORN) up to $32.00.  Buy the Teucrium Soybean Fund (SOYB) up to $23.43 and Teucrium Wheat Fund (WEAT) remains a buy up to $16.30.

INDUSTRIAL METALS

Recent Chinese manufacturing data is causing a bit of a panic for global markets.  As you may be aware, China’s January Flash PMI reading came in at 49.6 last Wednesday.  That’s well below the last reading of 50.5 and well short of analysts’ consensus estimate of 50.6.

No matter how you look at it, this sudden slowdown is not a good sign.

The fact the PMI fell below 50 is a clear signal something is not well with the Chinese economy.  And since China is the world’s largest consumer of copper, it should come as no surprise that the metal is trading lower on the news.

Folks, let’s not fight this recent development.  If Chinese growth is slowing, copper prices will suffer.

Go ahead and close your position in the iPath DJ-UBS Copper (JJC) for a gain of 5%.

PRECIOUS METALS

The precious metals complex is starting off 2014 on the right foot.  Gold, silver, platinum, and palladium are all in the green so far this year.

The big question now is… will it continue?

As you know, the supply/demand fundamentals for platinum and palladium are as bullish as they’ve been in years.  While these metals will likely have their ups and downs over the year, I’m confident they’ll end 2014 much higher than where they started.

Speaking of which, now that the iPath DJ-UBS Platinum (PGM) is beyond our buy-up-to-price of $30.50, I’m moving it back to a hold.  Also, the ETFS Physical Palladium Shares (PALL) remains a hold as it is beyond our adjusted maximum buy price of $66.00.

As far as gold and silver go, investors are still searching for the key piece of information to get firmly back on the bullish side of the market.

Of course, we know from our December 2013 trade alert the cost of production metrics for silver will eventually lead to higher prices.

As is usually the case with value plays, the market may take a while to figure it out.
But once it does, I assure you silver will be trading much higher than it is now.

Be sure to add the iShares Silver Trust (SLV) to your portfolio at any price under $19.66.

SOFTS

Cotton rose to a multi-month high of 86 cents a pound in recent trading thanks to ongoing US inventory fears.  However, the recent push higher is at risk of a downturn due to growing worries from China.  Investors are hearing rumors the country is on the verge of releasing a massive cotton stockpile onto global markets.  If that’s the case, cotton could plummet any day.

As far as sugar goes…

The commodity fell below 15 cents a pound in recent trading… the lowest price since mid-2010.

Clearly, investors are in no hurry to jump into this market thanks to the overwhelmingly bearish supply/demand fundamentals.  But remember, with sugar trading at multi-year lows, it’s not out of the question to see a short sellers take profits on their positions, sending prices higher.

LIVESTOCK

No doubt about it, the livestock markets are on fire in 2014…

Live and feeder cattle shot to an all-time record high a few days ago thanks to exceptionally strong cash market sales.  As I’ve mentioned many times in the past, the outlook for cattle pricing is very good thanks to the ongoing US supply shortage.

 

Category: Commodity Trading