Commodity ETF Alert March 2014 Portfolio Update

| March 25, 2014

 

A PERFECT STORM FOR COCOA BULLS?

As you know, I sent out an email on March 13th, alerting you to the buying opportunity in the iPath DJ-UBS Cocoa (NIB).

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 monthly trade alert a few weeks ago, scientists are becoming increasingly concerned about the likelihood of an El Niño developing in the Pacific Ocean this year.

In fact, the Australian Bureau of Meteorology is reporting that waters in the Pacific have already “warmed significantly over the past two months”.

They go on to say their weather models are “showing sea surface temperatures reaching El Niño thresholds during Southern Hemisphere winter.”

When this peculiar ocean phenomenon occurs, it alters weather patterns around the globe.  Some regions get more rainfall, while others get less.

And one region that usually gets less moisture is the West Coast of Africa.

And that’s bad news for cocoa producers…

Remember, the vast majority of the world’s cocoa production comes from three West African nations—Ivory Coast, Ghana, and Nigeria.  All told, 70% of global production comes out of this region.

So it goes without saying that if El Niño comes to fruition like so many meteorologists are currently predicting, it will make an already bullish cocoa situation even more so.

As a matter of fact, the International Cocoa Organization (ICCO) just released its first official forecast for the 2013-14 crop year.  The industry group estimates world cocoa production will reach 4.1 million tons, which is slightly higher than the 3.94 million tons produced last year.

But listen to this…

Thanks to surging global demand, ending season stocks will only reach1.54 million tons.  That’s smaller than last year’s estimated ending stocks of 1.66 million tons.

All things considered, the ICCO predicts a 2013-14 global cocoa shortfall of 115,000 metric tons.

What has cocoa demand surging?

Once again, we must look to China.  Thanks to the country’s burgeoning middle class, there are millions of new chocolate consumers arriving yearly.  As you’re likely aware, chocolate is considered an affordable luxury.  Once a consumer has disposable income, it’s one of the first things they buy.

According to market-research firm, Euromonitor, global chocolate sales are expected to climb to 7.5 million tons this year- the highest level since 2008.

What’s more, due to the rise in Chinese consumption, the firm expects global cocoa demand to outstrip supply through 2018.

As you can see, the supply/demand picture for cocoa is undeniably bullish.

And remember, that’s before El Niño is factored into the equation…

If the disruptive weather phenomenon makes an appearance over the next six months, we’ll likely see investors push cocoa firmly above $3,000 a ton.  If we’re patient, we should see the commodity rise to the $3,500 range.

Speaking of prices…

Since I recommended the iPath DJ-UBS Cocoa (NIB) earlier this month, cocoa has endured a bit of whippy price action.  The commodity is currently working on surpassing the highly important $3,000 a ton mark.

I suspect we’ll see a few more weeks of meandering price action as the commodity digests this important price milestone.

If you haven’t already, go ahead and purchase NIB at any price under $39.75 per share!

 

COMMODITY REVIEW

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $18.54 $19.28    -3.8%
Grains JJG $49.78 $46.17    +7.8%
Industrial Metals JJM $27.45 $28.42    -3.4%
Precious Metals JJP $66.23 $67.80    -2.3%
Softs JJS $51.22 $52.24    -2.0%
Livestock COW $31.79 $29.07    +9.4%
All Commodities DJP $38.97 $39.27    -0.8%

 

ENERGY COMMODITIES

It’s been a bit of a bumpy ride for West Texas Intermediate (WTI) crude since we spoke last.  The commodity backtracked from $105 a barrel on worries of building US crude stockpiles.

As you may know, refineries perform regularly scheduled maintenance during the Spring months.  Due to the reduced crude demand that comes with the maintenance season, US inventories are climbing to multi-month highs.

I expect another few weeks of uneventful price action in the oil market before bulls return.

As far as natural gas goes…

The commodity is breaking lower now that Spring is on the horizon.  Temperatures are still a bit below average in the Eastern US, but an overall warming trend is expected soon.

However, be ready to jump on the bullish side of this market when it approaches $4 mmBtu.

US inventories are severely depleted due to the harsh winter.  If we get a warmer than normal summer here in the US (see El Niño effect above), we should see $4 become the new price floor for natural gas.

GRAIN COMMODITIES

Grains are really heating up…

Not only is the Spring planting season right around the corner, but the additional uncertainty surrounding the Ukrainian crisis has grain investors on edge.

As you’re likely aware, Russia recently invaded and annexed the Crimean peninsula.  In response to Russia’s aggression, the US and Europe are applying trade sanctions.  That has investors worried the flow of grains out of Ukraine will become increasingly uncertain.

As you may know, Ukraine is one of the top 5 exporters of wheat and corn in the world.  And a large portion of those exports go through ports on the Crimean peninsula to the Black Sea.

Both corn and wheat are reacting quite bullishly to the ongoing uncertainty.  Corn has jumped to just under $5 a bushel while wheat is popping over $7.  That has our positions in the Teucrium Wheat Fund (WEAT) and Teucrium Corn Fund (CORN) on the rise.

Keep holding WEAT and CORN for further gains.

As far as soybeans go…

Strong US export data has soybean investors pushing prices higher.  As a result, the Teucrium Soybean Fund (SOYB) is beyond our buy-up-to price of $23.43.  Keep holding SOYB for additional upside in coming months.

INDUSTRIAL METALS

Industrial metals are suffering a steep downdraft.  As a matter of fact, copper recently plunged to new multi-year lows under $3.00 a pound.

What’s going on?

Recent HSBC flash PMI numbers show China’s economy is slowing to its lowest level in nearly eight months.  Growing worries over the strength of the Chinese economy has investors selling now and asking questions later.

And that’s not all…

A rare Chinese corporate bond default has investors wondering about the ultimate strength of China’s banking system.  If more corporate defaults arrive in coming months, there’s a very real possibility of a credit crunch in the Chinese economy.

If anything is going to slow the commodity bull run this year, it will be bearish news out of China.

This is something we need to keep a very close eye on.

PRECIOUS METALS

Finally!

Palladium is breaking to multi-year highs near $800 an ounce.  I know it’s been a long, tough slog with our position in the ETFS Physical Palladium Shares (PALL) but now we’re seeing the fruits of our patience.

What’s sending the metal higher?

Once again we must look to the Ukrainian crisis.  Since Russia is one of the world’s largest suppliers of palladium, looming trade sanctions have investors wondering just how much global supply may disappear in coming months.

What’s more, two new palladium ETFs are hitting the South African stock exchange in Johannesburg.  Since the ETFs are backed by physical palladium, capital inflows to the ETFs will take much needed supply off the global market.

Given the current supply/demand picture, palladium’s bullish run is likely just getting started.

Keep holding PALL for higher prices in the months ahead!

Platinum isn’t performing quite as well as palladium, but we still need to hold on to our position in the iPath DJ-UBS Platinum (PGM).

As far as gold and silver go…

Federal Reserve Chairwoman Janet Yellen surprised precious metal investors last week. She unexpectedly announced interest rates would be linked to the end of QE3 instead of the unemployment rate.

That means the arrival of higher rates may come sooner than investors previously thought.  And since gold offers no yield, higher rates will present a headwind.

So should we cut gold and silver from our portfolio?

Not a chance…

We knew going into our trades in the iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU) that the ride would be bumpy.  We may see a bit of extended weakness, but I firmly believe value buyers will keep the metals from breaking to new multi-year lows.

Speaking of value buyers, SLV is back below our max buy price of $19.66.  If you haven’t already, go ahead and add the silver ETF to your portfolio.  If IAU falls below $12.60 over the next few weeks, you may start buying it again as well.

SOFTS

Coffee is losing its bullish luster.  After shooting to multi-year highs at $2.00 a pound in early March, the commodity is easing back to the $1.75 area.  Fears the spectacular bullish run is overdone has investors taking their gains to the bank.

Speaking of taking profits…

As you know, we brought home a hefty 45% profit in the iPath Pure Beta Coffee (CAFE) thanks to the early year coffee rally.

Here’s what a few of you had to say about it…

“Nice call on the coffee play. On Jan 29, picked it up at 15.40, so currently sitting on a 40.33% gain.” — W. Bishop

“I cashed out of CAFE today, Feb 24th at $23.06 for a 47% gain. Keep those type trades coming. I know there is a possibility that you will raise your $23 price target again but I’m taking the profits.” — Jack B.

Thanks for your messages and congratulations on the great trade!

If you have a similar story, email me at [email protected]. I’d love to hear about your success, or any other comments and concerns you may have.

LIVESTOCK

Wow…

The uptrend in livestock just keeps on going.  Feeder cattle surged to another all-time high yesterday.  What’s more, the lean hog market is on a bullish roll of its own thanks to the ongoing outbreak of porcine epidemic diarrhea virus (PEDv).

As you may remember, this nasty virus popped up about a year ago in a few Midwestern states.  We didn’t hear much more about it until a recent report revealed the virus has spread to 27 states.

To make matters worse, the USDA reports the virus is “accelerating”.  Since there’s no cure, it’s anybody’s guess as to how much of the US hog population will be affected by the disease.

It’s tempting to get long the iPath DJ-UBS Livestock ETN (COW) in response to the news.  But since cattle and hogs have already has such a spectacular run, it’s best we stick to the sidelines.

 

Category: Commodity Trading