Commodity ETF Alert October 2014 Portfolio Update
Delayed US Harvest Has Corn Bulls Charging!
As you know, I sent out an email on October 7th, alerting you to the buying opportunity in the Teucrium Commodity Trust Corn Fund (CORN)
Here’s additional insight into why we made this trade, and how it’s performing thus far.
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Things are finally looking up for corn…
After a brutal Summer of selling, the essential commodity is showing signs of a long-term bottom.
In fact, over the past few weeks, corn has rallied from $3.20 a bushel up to $3.65—a nifty 13% rally.
What has the commodity on the upswing?
As I mentioned in our recently released monthly trade alert, corn was essentially left for dead in late September.
At the time, investors were factoring in abundant USDA forecasts. The government agency has this year’s corn crop coming in around 14.5 billion bushels… an all-time high.
Quite simply, there was no reason to be bullish on corn just a few short weeks ago.
But then something interesting happened…
Corn prices started creeping higher from the $3.20 a bushel lows on October 2nd. By the 6th of the month, the commodity had jumped to $3.32. As I watched corn trade, it was clear that speculators were trying to cover their massive corn short positions.
What had bearish investors running for the hills in early October?
Turns out, the same wet weather that helped grow massive corn crops over the past 4 months has left the fields too wet to harvest. In some parts of the US Corn Belt, farmers are still waiting to get into the fields to collect their bounty.
They are weeks behind schedule…
According to the most recent USDA crop progress report, a mere 46% of the US corn crop has been harvested. Last year at this time, 56% of the US corn crop was already off the field.
And believe it or not, 65% of the US corn crop is typically harvested by this time of year when you look at a 5-year average.
Clearly, the 2014 corn harvest is lagging badly.
What’s the big deal?
The longer corn stays in the field, the more susceptible it is to damage. According to a report from Ohio State University, stalk/root lodging and ear drop are commonplace when corn is left in the field too long.
And when that happens, yields tend to suffer.
As you may remember from our original corn trade alert, a large factor in the USDA’s robust 2014 crop forecast was record yields. As a matter of fact, the government agency is expecting 171.1 bushels per acre this year.
But if farmers can’t get the vast majority of US corn crops out of the fields by mid-November, that lofty yield estimate may prove unreachable.
According to Ohio State’s corn experts, 90% of yield loss occurs when corn stays in the field beyond November 15th.
The next few weeks could get very interesting in the corn market…
US farmers have their work cut out for them. Not only do they need Mother Nature to send them dry weather, but they’re playing a massive game of catch-up.
There’s no question corn investors will be watching the harvest progress carefully.
What about our position in the Teucrium Commodity Trust Corn Fund (CORN)?
The recent rally has CORN trading at $25.47- a 7.4% gain from our entry point. With our maximum buy price surpassed, I’m moving CORN to a hold in the portfolio.
Now keep in mind…
Even if farmers are successful in getting corn crops out of the field in good condition, keep holding CORN in your portfolio. Our entry price is near 5- year lows and we don’t want to give that up!
COMMODITY REVIEW
| Commodity | Ticker | Current Value | Last Month | Change |
| Energy | JJE | $14.84 | $16.82 | -11.8% |
| Grains | JJG | $36.78 | $33.54 | +9.7% |
| Industrial Metals | JJM | $28.84 | $30.00 | -3.9% |
| Precious Metals | JJP | $59.05 | $60.24 | -2.0% |
| Softs | JJS | $43.57 | $43.47 | +0.2% |
| Livestock | COW | $31.99 | $31.57 | +1.3% |
| ALL COMMODITIES | DJP | $33.76 | $34.36 | -1.7% |
| As of 10/27/14 |
Energy Commodities
Folks, I’ve been in the commodity industry for over a decade. But there’s one thing that just amazes me time and again…
And that’s just how irrational commodity markets can become in times of uncertainty.
Of course, I’m speaking of the recent drop of West Texas Intermediate (WTI) to $80 a barrel. It wasn’t long ago the commodity was trading at $95. But irrational fears of US oversupply and a stumbling Eurozone economy are sending crude plummeting to multi-year lows.
Now listen closely…
The recent collapse in oil has more to do with expectations than reality.
Currently, there’s no oversupply here in the US. In fact, oil inventories for the week of October 17th came in at 377 million barrels. That’s within the normal range for this time of year.
See for yourself…
While inventories are rising due to the onset of refinery maintenance season, US crude stockpiles are still sitting well within a two-year range.
What about Europe?
Even though data from the region has come in decidedly weak lately, the Eurozone economy is not in a recession. Additionally, the European Central Bank (ECB) is currently taking steps to stimulate various European economies.
Like I said, the recent downturn in the price of oil has more to with irrational expectations than reality.
But here’s the deal…
Regardless of the facts I present to support my thesis that WTI crude shouldn’t be trading this low… it is.
The uncertainty created by global growth and oversupply fears has changed the dynamics of the oil market. Instead of trading on facts, it’s trading on emotion.
It’s abundantly clear that oil investors have adapted a ‘sell now, ask questions later’ mentality.
Unfortunately, the recent drop in WTI has sent our position in the US Oil Fund (USO) to just under $31. That’s an 11% drop from our $34.90 buy price in early September. Obviously, this isn’t the outcome we’re looking for.
What do we do now?
Under normal circumstances, I would recommend buying additional shares of USO at these remarkably low prices. But due to the abrupt change in investor mentality over the past few weeks, that’s not the right plan.
Instead, let’s leave our USO position at a Hold. What’s more, set a stop loss order at $29.75 in USO. If continued irrational market action carries the crude market to new lows, we don’t want to suffer continued losses.
What about natural gas?
Unfortunately, Mother Nature isn’t cooperating with us. Warm weather is sending the commodity lower. Temperatures across large swaths of the US have been well above average for most of October. What’s more, the NOAA predicts a continued run of warm weather across the majority of the US over the next 8-14 days.
With Old Man Winter nowhere to be found, bears are in firm control of natural gas.
Folks, if cold weather doesn’t show up soon, there’s a growing risk natural gas could fall into the low $3 range. Unfortunately, this is a risk I’m not willing to take. That’s why I recommend you move US Natural Gas Fund (UNG) to a hold and set a stop loss order at $18.75.
It’s unfortunate the natural gas market has reached this state. I am still very bullish on this commodity in the long run, but we just can’t afford to argue with Mother Nature in the short term.
Grain Commodities
Believe it or not, the entire grains complex is seeing strong gains in October. Corn, soybeans, and wheat are up 12.8%, 11.5%, and 11.9% respectively. Gains in soybeans are coming from similar factors that are present in the corn market mentioned above.
On the other hand, wheat market gains are coming from recent crop reports out of Russia. Extended bouts of dry Fall weather and an early onset of cold temperatures are hurting the country’s Winter wheat prospects.
I’ll keep a close eye on the situation in Russia as it may be a catalyst for sharply higher wheat prices in 2015. See this month’s CORN update (above) for additional insight on the grains complex.
Industrial Metals
Chinese economic uncertainty is keeping a firm lid on the price of copper. Even though a recent GDP reading revealed the Chinese economy grew by a solid 7.3 % in the third quarter, other data sources paint a less optimistic picture.
Industrial production, fixed asset investment, and housing data are all showing signs of weakness. If the Chinese economy can’t overcome these issues, it’s growing increasingly unlikely copper will see the upside we’re expecting.
As a result, I am moving our position in the iPath DJ-UBS Copper (JJC) back to a hold.
What’s more, set a stop loss order on JJC at $35.80.
If China’s data continues to disappoint, we don’t want to accept the risk of riding copper to sharply lower prices.
Precious Metals
As I’ve mentioned numerous times in previous updates, the US Dollar is a huge factor in precious metal performance. And unfortunately, the US Dollar index is still trading near 52-week highs.
Take a look…
There’s no question the Greenback’s recent bullish run has hurt our precious metals positions. Even though the supply/demand balance strongly favors gold, silver, platinum, and palladium prices in the long run, investors are instead focusing on the metals’ relationship with the Dollar.
What do we do with our precious metals positions?
First of all, there’s a very important Federal Reserve meeting tomorrow. If the Fed follows through with their plan to end quantitative easing (QE) in October, we could see the US Dollar rise further.
On the other hand, if they vote to delay the end of QE until global economic data is stronger, we may see the Greenback reverse to lower ground.
No doubt about it, a lot is riding on Wednesday’s Fed meeting…
That’s why we’re moving all our open precious metals positions to a hold, and putting stop loss orders below them.
Unfortunately, the event risk is too high to simply let our positions in the iShares Silver Trust (SLV), iShares COMEX Gold Trust (IAU), ETFs Physical Platinum (PPLT), and ETFs Physical Palladium (PALL) float with the breeze.
As a result, here are the levels we need to watch:
- IAU — stop loss order at $11.40
- SLV — stop loss order at $15.95
- PPLT — stop loss order at $118.50
- PALL — stop loss order at $74.26
If any of the positions above hit a stop level, close the trade.
It’s disappointing that investors are completely ignoring the bullish long-term supply/demand metrics present in the metals above. But we have to wake up to the possibility that precious metals may trade much lower if the US Dollar continues to higher ground.
Softs
Cocoa prices are cooling after an Ebola induced panic sent the commodity soaring to $3,400 a ton in late September. With no sign of the deadly disease showing up in the Ivory Coast or Ghana (the world’s top cocoa producers), investors are quickly taking the risk premium out of the market.
And that’s not all…
Recent data from the Cocoa Association of Asia reported a 6% drop in Q3 cocoa grindings. Since rising Asian demand is a key driver behind surging cocoa prices in recent years, the abrupt softening in this market is worrisome.
Folks, let’s not take a chance of riding cocoa to lower prices. The sudden slowdown in Asian demand may stall the upward trend in this commodity. As a result, let’s put a stop loss on our position in the iPath DJ-UBS Cocoa (NIB) at $37.90.
What about coffee?
The caffeinated bean popped to $2.20 a pound in mid-October as Brazilian drought fears buoyed investor sentiment. The rally sent our position in the iPath Pure Beta Coffee (CAFE) up $28.75, which was a 20% gain from our entry.
But recent reports reveal Brazil is finally getting some much-needed rain. As a result, coffee prices are sinking to multi-week lows near $1.90.
Obviously, we’ll need to keep a close eye on the Brazilian weather situation. If rain continues, we may see coffee drop to $1.80 or lower. As a result, let’s move CAFE to a hold and set a stop loss order at $21.50.
On the other hand, if drought fears resurface, we’ll still be holding CAFE for higher prices!
Livestock
The feeder cattle contract is finally starting to cool. After a phenomenal September rally from $2.15 a pound to $2.40, the commodity has essentially traded sideways for most of October.
I wouldn’t be surprised to see cattle futures trade sideways for the foreseeable future now that the high demand Summer grilling season is over. But remember, long-term supply/demand metrics are still strongly in favor of the bulls!
Category: Commodity Trading
