Commodity ETF Alert June 2011 Issue

| June 11, 2011 | 0 Comments


Talk about wacky weather…

Early 2011 may go down as one of the most volatile periods in recent history.

As beleaguered citizens of the Southeast and Midwestern US are finding out, unpredictable tornadoes are a common occurrence this spring.

These violent twisters have left hundreds dead and thousands without homes.  Experts say it’s the deadliest tornado outburst since 1936.

Of course, these volatile weather patterns are bringing tons of rain.  And that’s having a big effect on the commodity markets.

Take corn for example…

An exceptionally wet spring is sending corn prices through the roof.  In fact, corn is setting new all-time record highs… just under $8.00 per bushel!  Prices this high are unheard of!

And amazingly enough, the fundamentals support corn at these record levels.

Flooding in the MississippiMissouri, and Ohio River valleys are pushing farmers’ planting schedules well behind schedule.

As a result, corn yields are going to come in much lighter then expected.  And that has prices shooting through the roof.

But corn isn’t the only crop with issues…

Sugar fundamentals are looking much more bullish recently.  Heavy rainfall in parts of Brazil is delaying production.  In fact, farmers in Brazil’s Center-South region are reporting a 47% production plunge since harvesting began in mid March.

Lower than expected production from this region is already having an impact on sugar prices.

What’s so important about this region?

The center-south region produces 90% of Brazil’s sugarcane crop.  And since Brazil is the world’s largest producer of sugarcane, what happens in this region makes the sugar market move.

But weather isn’t the only problem…

Brazil is also having trouble getting their sugar crops to ports for shipment.  Last year a ‘traffic jam’ of epic proportions sent sugar prices surging.  Sugar trucks in the Brazilian Port of Santos were backed up for miles trying to unload their shipments.  And cargo ships were floating in limbo for weeks, waiting for their turn to dock.

The whole mess put upward pressure on sugar prices in mid 2010.  And according to various reports, the same backup is starting again this year.

Why can’t Brazil move sugar to ports more efficiently?

So far, Brazil hasn’t built sufficient port infrastructure.  They just can’t move the sugar through the loading process fast enough.  And with the world demanding record amounts of sugar, these ports need blazing efficiency.

But the biggest catalyst for higher sugar prices is ethanol…

Ethanol usage in Brazil is skyrocketing.  The country is transforming its transportation system to run predominantly on ethanol.  Over 80% of new vehicles sold in Brazil are flex-fuel vehicles.  These engines can run on gasoline, ethanol, or a mixture of both.

Analysts expect the ethanol trend to grow…

The Brazilian government is pouring billions of dollars into their ethanol industry.  And as more Brazilian motorists switch to ethanol burning engines, the demand for ethanol can only increase.  Of course, the more sugarcane put into ethanol production, the less put into sugar production.

And that means the sugar market will grow tighter… supporting higher prices.

Now, let’s sort out the short-term and long-term catalysts…

The Brazilian weather and shipping issues should provide near-term strength for sugar. Prices may even test the historic highs of $0.29 per pound set earlier in 2011.

In the long-term, growing ethanol demand should keep a floor under sugar prices. That’s not to say the sugar market won’t see its fair share of ups and downs.  The constant barrage of industry news will continue driving volatility in this market.

The bottom line is this…

The recent pullback in sugar is a great buying opportunity.  World sugar demand is growing.  And ethanol producers are competing for larger supplies of Brazilian sugarcane.  These two forces should keep sugar prices rising in a solid uptrend.


The iPath DJ-UBS Sugar ETN (SGG) is an ETN reflecting the price of sugar.  SGG tracks the Dow Jones-UBS Sugar Total Return Sub-Index.  This index reflects the returns potentially available through an unleveraged investment in the futures contracts on physical sugar.


Take a look at the chart…


SGG is currently trading at 81.54.  As you can see, sugar took quite a nosedive from February through May.  But now, with worries over Brazilian supplies, prices are moving higher once again.  Go ahead and add shares of SGG to your commodity ETF portfolio right now…


The iPath DJ-UBS Sugar ETN (SGG) is trading at $81.54.
Buy SGG up to $82.50 per share.
Our profit target is $95.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $23.88 $23.73    0.6%
Grains JJG $54.53 $52.71    3.5%
Industrial Metals JJM $43.47 $44.19   -1.6%
Precious Metals JJP $87.43 $89.35   -2.1%
Softs JJS $81.51 $78.68    3.6%
Livestock COW $28.19 $29.41   -4.1%
All Commodities DJP $49.30 $49.32    0%


The oil market is getting a lot of mixed signals lately…

A recent OPEC meeting put the market on edge last week.  The cartel of oil producing nations couldn’t agree on a production increase for world markets.  Of course, the news sent the oil market dramatically higher.

But then poor US economic news hit the headlines…

May jobs numbers were much weaker than economists were expecting.  And manufacturing data suggests economic growth is slowing.  These figures have some investors fearing the economic recovery is sputtering.

That sent oil back below $100…

Where’s the oil market heading?  No doubt about it, oil is extremely volatile right now. The market is getting tugged in multiple directions.

But here’s the most important thing to watch with oil…

JP Morgan and Goldman Sachs are predicting world oil demand will start eating into OPEC spare capacity later this year.  Both of these large investment houses are calling for $130 oil by fall.

And that my friends, is very bullish for oil…

Let’s keep holding our position in JJE and UNL for higher prices.


A recent USDA crop report suggests US corn inventories will come in lighter than expected this year.  And like I said earlier, corn is already trading near all time highs. As we progress into summer, weather news is going to rule the grain markets.

Our position in grains (JJG) remains strong both fundamentally and technically.  Let’s keep holding this position for higher prices.


Copper is trading a lot like oil right now…

Mixed economic news has the metal trading all over the map.  However, the $4.00 level is strong support for copper.  And considering the depth of the correction in the US equities markets, copper is holding up rather well.

As long as wildly negative economic news doesn’t roll across the headlines, copper should remain above the recent swing lows of $3.90.  If the negative news turns just a little more positive, we should see investors take copper higher.

Keep holding our position in JJC for higher prices…

Our entry into palladium last month is proving to be spot on.  Palladium has risen substantially in just the past few weeks.  Our shares of PALL are approaching 52-week highs and our price target of $85.

Let’s keep holding PALL as the uptrend in Palladium continues…


Gold is still holding above the $1,500 an ounce level, which is amazing considering the recent strength in the US Dollar.  Our position in IAU remains in a strong uptrend and we expect the gold bull-run to continue.

Gold’s little brother, silver, is falling towards the $35 an ounce level once again.  Since the CME raised silver margins through the roof in late April, this market has lost a lot of its luster.  Silver should continue trading around the $35 to $30 level for a while longer.

After its violent correction, the silver market will take time to heal…

However, I still expect higher silver prices in the future.  The fundamentals for silver haven’t changed and the recent sell-off is an excellent buying opportunity.  But be patient, we want to get the best deal possible in silver.

Platinum is getting a nice bounce off its long-term uptrend line.  The precious/industrial metal still has very favorable long-term fundamentals.  Keep holding our position in PGM for higher prices.


The soft commodities are firming up in recent trade…

Coffee is holding near multi-week lows but looks like it’s setting up for a bounce in coming days.

Cotton is trading near the May lows but could soon move higher due to drought conditions in Texas.  The USDA will be updating the cotton crop situation shortly.  If expected inventories drop substantially, cotton may take a run at the recent April highs.


The cattle market continues to slide as profit taking and high corn prices keep investors at bay.  Since Midwest feedlots use corn as a predominant feed, corn prices are keeping a lid on cattle prices.

I’m keeping a close eye on livestock, but I don’t see an opportunity for a trade in this market right now.

Portfolio Changes

  • This month we’re adding Sugar (SGG) to the portfolio.  See above for all the details.

Category: Commodity Trading

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.