Commodity ETF Alert May 2014 Portfolio Update

| May 27, 2014 | 0 Comments

 

COFFEE: ANOTHER SPECTACULAR BULL RUN IN STORE?

As you know, I sent out an email on May 16th, alerting you to the buying opportunity in the iPath Pure Beta Coffee ETN (CAFE).

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

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After an extremely strong start to the year, coffee bulls are looking for another reason to rampage…

As you know, the price of coffee surged 90% in early 2014 as Brazilian drought fears overwhelmed the market.

But over the past few weeks, bulls have slowed to take a breather.  New Brazilian crop information trickled in that forced investors to rethink their long positions.

Some reports revealed conditions may not be as bad as previously thought, and that Brazil may have a decent coffee crop after all.

But Brazil’s official crop bureau, Conab, just squashed that idea…

The government agency recently announced an updated coffee production estimate of 44 million bags.

As I mentioned in the buy alert, Conab’s most recent estimate is well below the 50 million bag outlook released earlier in the year.

The agency pointed to drought and heavy pruning by growers when prices were low last year.

While this lowered estimate is important, it’s only the first part of the story…

Coffee trees go through a natural cycle of high and low production from one year to the next.  If a tree has high productivity in one growing season, it will use most of its energy to develop that crop.  Once harvested, the tree will naturally put less energy into new productive tissue for next season’s growth.

After a low cycle last growing season, 2014 was supposed to be a “high cycle year” for Brazil.

But the recent drought changed all that…

There isn’t an analyst out there that sees this year’s coffee crop performing better than the “low cycle” crop from last year.  As a matter of fact, most estimates see a year-over-year production downturn of nearly 10%.

Brazil hasn’t recorded a successive drop in coffee production since 1995!

And here’s the real kicker…

Since this year was supposed to be the “high-cycle” crop, trees will naturally produce an even smaller crop next year.

The situation has some coffee market analysts calling for a spike to $3.00 a pound!

But believe it or not, there’s even more bullish coffee news…

Central America is suffering the worst outbreak of leaf rust in history.  In case you’re unaware, leaf rust is a fungus that greatly diminishes a coffee tree’s ability to produce fruit.

Production from Guatemala to Panama has dropped 20% since 2011.  According to the United States Agency for International Development (USAID), total losses due to the leaf rust outbreak are quickly surpassing $1 billion.

What’s more, the USAID foresees another 15-40% drop in Central American coffee production over the next two years.

Folks, the stars are aligning for a long-term bullish run in the price of coffee…

The mixture of low Brazilian production this year and next, along with the ongoing production downturn in Central America, will take its toll on global coffee inventories.

And since consumers are essentially willing to pay any price for coffee, demand for the commodity is only expected to grow.

The only remedy for this situation is higher prices!

While we may see some seesaw action over the next few months as South American harvest reports come in, coffee is a buy at any price under $1.85 a pound.

As you know, we’re using the iPath Pure Beta Coffee ETN (CAFE) as our means to get long the coffee market.  Last week’s slight pullback in the commodity is giving us a great opportunity to buy CAFE under our official entry point.

If you haven’t already, go ahead and buy CAFE at any price under $23.90 a share.

Our profit target is $30.00 or more!

 

COMMODITY REVIEW

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $19.23 $19.63    -2.0%
Grains JJG $48.97 $49.73    -1.5%
Industrial Metals JJM $29.91 $29.25    +2.3%
Precious Metals JJP $63.48 $63.53    -0.1%
Softs JJS $50.80 $53.82    -5.6%
Livestock COW $30.76 $30.85    -0.3%
All Commodities DJP $39.84 $40.22    -0.9%

 

ENERGY COMMODITIES

West Texas Intermediate (WTI) is pushing back to multi-month highs near $105 a barrel.  The recent advance comes in spite of the fact that US oil inventories are sitting near all-time highs.

What’s keeping crude at seemingly over-inflated prices?

Geopolitics…

Not only is the Ukraine situation still a bit dicey, but now energy investors have Libya to worry about.  Recent violence in the North African nation provides little hope that oil exports from the country will reach the lofty levels it was once accustomed to.

In case you’re unaware, Libya has the largest proven oil reserves on the African continent.  What’s more, the war-torn country exported around 1.5 million barrels of oil per day before civil war broke out a few years ago.

Given the current state of global affairs and the looming summer driving season, crude will likely keep a bullish tone for months to come.

As far as natural gas goes…

Recent EIA weekly inventory reports reveal natural gas producers are gaining ground.

In fact, last week’s data release showed producers added 106 bcf of the commodity to storage for the week of May 16th.  Since the report was above analysts’ estimates, the price of the natural gas fell in response.

What do we do with our position in the US Natural Gas Fund (UNG)?

Given the recent advance in storage levels, a drop to the low $4.00 range may be approaching.  In such a situation, I suggest you add to your bullish position in UNG.

Remember, storage levels are still 37.9% below last year’s levels and 42.7% below the 5-year average.  As a result, any sort of weather-based supply disruption will bring bulls right back into the natural gas market.

If you haven’t already, go ahead and purchase UNG at any price under $25.27.

GRAIN COMMODITIES

Amicable weather has the US spring planting season going off without a hitch. Remember, it wasn’t long ago investors were concerned of soggy ground hampering planting efforts.

That worry is out the door now…

Recent USDA crop progress reports show corn planting is now running ahead of schedule at 59% complete.  As you may be aware, corn investors are already heading for the exits in response to this news.

And that’s not all…

Wheat bulls are jumping ship because of recently announced lofty global production estimates.  Many analysts feel soybeans aren’t far behind in the quickly developing grain selloff.

What do we do with our positions now?

Remember, we’re long all three of the major grains via the Teucrium Wheat Fund (WEAT), Teucrium Corn Fund (CORN), and Teucrium Soybean Fund (SOYB).

Let me be perfectly clear…

There’s still a good chance of grains rebounding and achieving higher prices this summer.  However, it will likely be a very bumpy ride given the growing possibility of another bumper US crop.  Quite simply, the upside potential of staying long grains is simply not worth the looming downside risks.

As a result, we’re closing all three of these positions now…

Given the most recent pricing information, our trade in CORN will result in a loss of around 7%.  Our trade in WEAT will result in a loss of 9%.  But the good news is, our trade in SOYB will result in a gain of 12%.

Our overall position in grains results in a slight loss of 4%.

Remember, these figures are based on the official entry prices.  If you purchased these ETFs at a lower price, your results will obviously be better.

It happens occasionally, but this is one of those cases where bullish potential has suddenly diminished due to quickly changing fundamentals.

INDUSTRIAL METALS

Copper is still recovering nicely from the hefty losses seen in early March.  The red metal is still holding onto a multi-month uptrend that has it trading at $3.17 a pound.

What has the bulls getting more confident in this market?

Not only has there yet to be another Chinese corporate bond default, but recent economic data out of China is improving.  Last week’s May flash manufacturing PMI came in at 49.7, which is just a whisker below the all-important 50 level.

Remember, a reading below 50 signifies contraction in the economy, while above 50 signifies expansion.

While May’s reading is still reflecting contraction, it’s a vast improvement over the 48.3 reading seen in April.  What’s more, the reading came in much better than many economists’ estimates.

As always, we must keep a close eye on Chinese economic data.  If the trend keeps improving in coming weeks, we may be looking for another entry point in copper soon!

PRECIOUS METALS

Gold and silver have come to a literal standstill.

Gold is stuck in a tight trading range around $1,290 while silver has stalled around $19.50.  Not surprisingly, our positions in the iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU) aren’t seeing much action either.

But here’s the deal…

The recent lack of volatility is setting up a big move.  And once gold and silver break out of their recent trading ranges, investors will pile on the momentum and carry them quickly higher or lower.

No matter which direction- it will be good news for us.  If the metals break higher, we’ll see the bullish move we’ve been waiting for.  If they break lower, it will give us another great long-term buying opportunity.

Remember our thesis in gold and silver…

Prices aren’t high enough for miners to sustain sufficient production capable of meeting long-term global demand.  If gold and silver stay at current levels or lower, a supply shortfall is nearly certain to develop in the not-so-distant future.

If you haven’t already, buy SLV up to $19.66 and IAU up to $12.52.

What about platinum and palladium?

Palladium and platinum are looking strong.  Not only is the issue with Russia still on investors’ minds, but South African labor disputes are raising fears as well.

In case you’re unaware, striking South African miner unions are still in talks with some of the world’s largest platinum and palladium producers.

The most recent headlines suggest Anglo American Platinum, Impala Platinum, and Lonmin are far from a pay raise that would put miners back to work.  According to analysts at Commerzbank, 10,000 ounces of platinum and 5,000 ounces of palladium are lost each day the strike wears on.

Remember, Russia and South Africa provide around 80% of global platinum and palladium supply.  As a result, investors pay close attention to political issues in these two countries.

Our gains in the ETFS Physical Palladium Shares (PALL) are pushing 10%.  Let’s keep holding this ETF for further gains in coming months.  The iPath DJ-UBS Platinum (PGM) is nearing our original entry point.  Keep holding for higher prices.

SOFTS

After a quick bout of selling in early May, our position in the iPath DJ-UBS Cocoa (NIB) is back on the move to higher prices.  The ETF is crossing the tape near $39.55, which is just beyond our maximum buy-up-to price of $39.41.

Cocoa investors are looking to the seemingly ever-growing odds of an El Niño weather pattern developing by the end of the year.  If it comes to fruition (which experts are nearly certain it will), the weather pattern will likely bring drought to West Africa.

In case you didn’t know, the West African nations of Ivory Coast, Ghana, Nigeria, and Cameroon provide the lion’s share of global cocoa supply.

As I’ve explained in recent reports, a drought is the last thing cocoa producers in this area need.  Even with perfect weather, growers struggle to bring enough supply to the global marketplace.

Let’s keep holding NIB for a break to higher prices in coming months!

LIVESTOCK

Another month, another new high for cattle prices…

Feeder cattle broke to yet another 52-week high in recent trading.  Cattle for August delivery came within a whisker of $2.00 a pound last week as investors kept a close eye on cash sales.

Believe it or not, ranchers are receiving over $2.10 a pound in the cash market in some parts of the western US!  After decades of low prices and poor economics, the US rancher is finally getting a much-deserved run of good luck!

As I’ve mentioned many times before, this incredible price run is due to supply fears stemming from a multi-decade low in the US cattle herd.

 

Category: Commodity Trading