Concerns over Federal Reserve policies have led to very uncertain trading as of late. In particular, investors have been wary about investing in commodities during this type of environment, as a stronger dollar is usually a disaster for natural resource prices.
While some commodity classes have remained mixed in this type of environment, agricultural commodities have been especially weak. In fact, the post popular agricultural commodity fund, (DBA - ETF report), is down about 1.5% over the past 10 days, underperforming broad commodity baskets like DBC or DJP in the process.
This ETF is extremely spread out, as no single commodity makes up more than 15% of the total portfolio, so it is hard to pinpoint any one product for the weakness. In terms of strength in this market though, a few of the soft commodity components are holding firm (read Invest Like Morgan Stanley with These 5 Commodity ETFs).
Strength in the space
In this weak market, some commodities have managed to stay strong and actually produce gains in the past two week period. These commodities could thus represent pockets of strength in the space, and ones that, thanks to supply/demand imbalances, may be better picks going forward for those who want to stay in the agricultural commodity market.
For these investors, we have highlighted two soft commodities holding firm, and some interesting exchange-traded ways to play them. These could be intriguing short term picks for those who are looking to either make a pairs trade in the commodity world, or just to focus on soft commodities that actually have a decent short-term outlook in this uncertain market environment:
While Chinese demand may not be to great in industrial metals, it has picked up a bit in the agricultural market, specifically with cotton. The country is now importing a bit more thanks to a farm support program, according to Agrimoney, which is helping to keep demand firm (see Buy These ETFs to Profit from the Global Population Boom).
Meanwhile, there are dry conditions in many key growing areas of the U.S. as well, which could further curtail supplies of the key crop. This trend is especially a problem in Texas, as the large state is actually the top producer of the crop in the U.S. by a pretty wide margin.
Plus, cotton futures aren’t seeing heavy contango either, something that can help in futures-based products. The commodity is actually seeing a modest level of contango when looking at the next few months—about 2.5%-- while the curve flattens out after that (see 3 Commodity ETFs Still Going Higher).
In order to play the cotton market, investors have two concentrated options. There is the iPath Dow Jones-UBS Cotton ETN (BAL - ETF report) and the iPath Pure Beta Cotton ETN (CTNN - ETF report).
BAL is the more popular choice of the bunch, though its volume and assets are still quite small compared to other commodity products. CTNN, meanwhile, looks to fight contango with its contract selection process, though its light volume could result in wider bid ask spreads.
In terms of performance, CTNN is up only slightly over the past ten days—adding about 1.8%-- while BAL has surged roughly 6.3% in the same time frame.
Sugar prices have been pretty weak so far in 2013, but there is some optimism that prices have bottomed out in this commodity. Brazil is expected to take a bigger cut of the demand picture in terms of ethanol, especially if gasoline prices continue to rise in the nation (thanks to a sluggish Brazilian real and the end of some subsidies).
Traders were also engaged in a short covering campaign, as many were anticipating big crops for the full year. This has unraveled as of late, with traders racing to cover their shorts, thereby boosting prices in the process.
Meanwhile, the U.S. government also appears ready to step in and buy from domestic growers of the crop. This move looks to boost prices, and remove up to 300,000 tons of the commodity from the U.S. market as well.
In the futures market for sugar, prices are a bit contangoed, with a roll of about 2%. Once again, the curve flattens out after this, so roll issues shouldn’t be too much of a problem in this commodity either (read Is USCI The Best Commodity ETF?).
Investors have a few options to target the sugar market as well. Currently, there is the iPath Dow Jones-UBS Sugar ETN (SGG - ETF report) and the iPath Pure Beta Sugar ETN (SGAR - ETF report).
SGG is easily the most popular choice in the space, crushing its counterpart in terms of volume and assets, though it is still light overall. SGAR, on the other hand, looks to avoid some contango issues with its contract selecting approach.
Over the last ten days, SGG has added about 1.5% while SGAR has risen by 2.2%.
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