Commodity ETF Alert October 2011 Issue

| October 11, 2011 | 0 Comments


I have to admit, without coffee I’m a little grumpy in the morning.

I love waking up to a freshly brewed cup of coffee.  There’s something about that first bitter sip that starts my day off just right.

Not only is a morning cup a requirement, I need an afternoon cup as well.  Sitting at the computer analyzing commodity markets all afternoon can be a bit tiring.

But a hot cup of joe keeps me plugging away.

I’m actually a little embarrassed to admit it… but without coffee I wouldn’t be nearly as productive.  A little caffeine clearly goes a long way.

And, I’m not the only one who thinks so…

According to, Americans consume a whopping 400 million cups of coffee per day.

That makes the US the #1 coffee consumer in the world.

And as you’ll see, more and more people around the world are waking up to a morning cup of java.

In 2009 alone, an estimated 130 million bags of coffee were consumed globally.  And according to the International Coffee Organization (ICO), global coffee consumption is increasing by 2.5% per year.

Where does all this coffee come from?

The world’s equatorial regions are home to the largest coffee producers in the world. Brazil, Colombia, Indonesia, and Vietnam provide the lion’s share of global supply.  And production in these countries keeps rising as the world’s top producers try to keep up with surging global demand.

In fact, coffee production is up nearly 18% in just the past decade!

But it’s still not enough to meet demand…

Maybe you remember this situation.  Back in mid 2010, a global supply shortfall kicked off a blistering rally in coffee.  Prices rose from $1.70 a pound to nearly $3.10 a pound… an 80% jump in no time at all.

But as 2011 progressed, coffee prices started easing.  Global economic uncertainty, along with seasonal market weakness, pushed coffee back below $2.30 a pound. Today, coffee’s selling for just $2.24 a pound.

And that creates a buying opportunity going into winter.


The coffee market has a seasonal tendency to bottom in September and October. Prices then tend to rise into the winter months on growing coffee consumption in the Northern Hemisphere.

The three largest consumers of coffee (US, Germany, and Japan) are all north of the equator.  As temperatures fall and consumption rises, coffee prices tend to move higher.

It’s a seasonal trend that’s worked for years…

However, most market analysts are expecting coffee prices to fall in coming weeks. Vietnam is unloading its coffee bean harvest onto global markets as we speak.  And most investors see coffee dropping to the $2.00 a pound level.

But that’s exactly why I think coffee will reverse its recent downtrend and move higher in coming months.  When the crowd is expecting a certain outcome, the market has a funny way of proving them all wrong.

And let’s not forget, the global coffee supply/demand situation is still incredibly tight.

According to the ICO, world coffee consumption currently exceeds production by 1.5 million tons.  And the supply shortfall is expected to keep getting worse as coffee demand surges.

What’s behind these lean supplies?

A number of coffee exporting countries are finding they have less coffee to send overseas.  For example, consumers in Indonesia and Mexico are buying larger quantities of domestically produced coffee.  And that leaves less supply for global markets.

As if that isn’t enough, there’s one more catalyst for higher coffee prices…

The Brazilian growing season is just getting underway.  If there’s any hint of unfavorable weather conditions for the 2012 coffee crop, prices could move higher in a hurry.

So let’s see if coffee can stimulate our portfolio by moving higher through the end of the year and into 2012.


One of the most convenient ways to invest in coffee is through the iPath Dow Jones-UBS Coffee Sub-index (JO).  JO is an exchange traded note (ETN) reflecting returns potentially available through investments in coffee futures.


Take a look at the chart…


JO is currently trading at $57.57.  As you can see, JO has dropped quickly in recent weeks due to the Vietnamese crop hitting the market.  And the European debt fears aren’t helping either.  I see coffee prices stabilizing and then moving higher towards the $3.00 a pound level in coming months.  If that happens, JO should move up towards the $75.00 area.


iPath Dow Jones-UBS Coffee Subindex (JO) is trading at $57.57.
Buy JO up to $58.00 per share.
Our profit target is $75.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $18.77 $20.75    -9.5%
Grains JJG $43.79 $52.98   -17.3%
Industrial Metals JJM $36.21 $41.46   -12.7%
Precious Metals JJP $92.46 $103.89   -11.0%
Softs JJS $75.07 $84.37   -11.0%
Livestock COW $30.70 $29.74    +3.2%
All Commodities DJP $43.33 $48.28   -10.3%


What a month for oil…

The commodity that lubricates the gears of global commerce traded below $80 a barrel for the first time in over a year.  The highly uncertain situation in Europe has the oil market trading in fear right along with nearly every other commodity.

But I think the oil market has hit its floor for the year…

Last week’s EIA petroleum status report shows oil stocks were down more than analysts expected… a lot more.  In fact, for the last week of September, oil inventories at Cushing, OK declined by 4.7 million barrels.  That’s a bullish signal for oil.

Unless there’s a major shock to the financial system in coming weeks, oil should easily hold above the recent $75 lows.  So keep holding USL for higher prices.

However, if oil breaks below $75 in the next two weeks, something bad in Europe must have happened.  If that turns out to be the case, close your position in USL. We can’t risk riding oil down to $40 a barrel.

As far as natural gas goes, be patient and keep holding.  If you haven’t already established a position in UNL, use these low prices as a buying opportunity.  Our buy up to price is $31.00.


What an ugly month for grains…

Corn, soybeans, and wheat are all down substantially from their late August highs.  A surging US Dollar, along with extreme economic uncertainty in Europe, had grain prices falling like a rock in September.

What’s more, recent USDA reports paint a less bullish scene for grains.  Yields for this year’s crop are now expected to be better than analysts were forecasting earlier in the year.


Fears of a global economic growth slowdown, along with the highly uncertain European banking problems, has industrial metals slumping to yearly lows.

Copper, aluminum, lead, nickel… they’ve all been hammered recently.  And with uncertainty swirling around the European debt situation, it’s best to steer clear of these economically sensitive markets for now.


The surging US Dollar is wreaking havoc on gold and silver prices.  Silver traded below $30 an ounce for the first time in seven months.  And gold dropped to just under $1,600 an ounce before stabilizing last week… a 15% drop from recent highs.

What happened?

Panicked investors were searching for liquidity.  Since gold is an asset where lots of investors had big profits, the yellow metal took a beating in recent weeks.

But I think the downside in gold and silver is limited…


European central bankers are trying to cure Greece’s debt problem with the same medicine that made it sick in the first place… debt.  Instead of realizing they’re only digging the hole deeper, they keep piling on more debt to try and save Greece from financial collapse.

What’s more, quantitative easing measures and extremely low interest rates are going to continue in major economies for quite some time.  These policies risk sparking a surge in inflation.

No doubt about it, these factors are strongly bullish for gold and silver.

But there is one caveat…

If the worst case scenario actually plays out in Europe- an uncontrolled Greek default- then gold and silver may have further to fall.

Another deflationary wave will strike global financial markets as a global banking and credit crisis ensues.  In that scenario, stocks and commodities will all take a dive while the US Dollar soars… a similar situation to 2008.

But if this unlikely scenario plays out, gold and oil are the first commodities you should buy once the storm clouds start clearing.

Remember, a global banking crisis is still an improbable event.  But be prepared for anything at this point.  Very few thought the problems in Greece would get this far… yet here we are.

Keep holding IAU and SLV for a bounce to higher prices.  But keep your eye on news headlines from Europe.  If things go from bad to worse, be prepared for IAU and SLV to fall further.


Soft commodities fared about the same as nearly all other commodities… down big for the month.  Cocoa, cotton, and sugar were all hit hard as the European debt panic darkened the market last month.

But last month’s drop pushed sugar to interesting levels…

The same fundamentals that I wrote about in June (and got us gains of 23% in SGG) are still in place for sugar.  Even if the world economy does enter another recession, I don’t see the slowdown affecting sugar demand as much as other commodities.

Along with coffee, I think sugar has a good chance of rising in coming months.


The lonely bright spot in the commodity complex is cattle prices.  In fact, the only commodities that didn’t dive lower last month were live cattle and feeder cattle.

That’s great since we added COW to our portfolio last month…

The supply shortage we talked about in last month’s report is a long-term problem for the US cattle market.  So while cattle prices may see some short-term volatility, I expect them to rise into 2012.

As of last night’s close, we’re up about 4% on our COW position.  Keep holding this position for further upside.

Portfolio Changes

  • This month we’re adding coffee (JO) 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.