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As investors have begun to calm down about the prospect of tapering, interest in commodities has picked up. Prices have been more stable for this asset class in recent weeks, with broad commodity ETFs seeing flat returns in the trailing one month time frame.
While this is obviously nothing to write home about, it is in stark contrast to trading earlier in the year, as most big commodity ETFs are actually still down more than 10% from a year-to-date look. This could suggest that commodity investing, even with the threat of the taper, may have some merit at this time (see 3 Sector ETFs to Avoid as Interest Rates Rise).
This could be especially true when looking at the soft commodity space, as by and large, products in this segment have done quite well (at least comparatively) to start 2013. Generally speaking, the reason for this segment’s outperformance has been growing conditions that have been favorable to price increases, or government intervention that has boosted prices.
Sweet Returns in One Commodity
One such commodity that has been the beneficiary of uncertain growing conditions in two of its top producing nations, and thus has been a top performer, has been cocoa. The commodity is widely grown in the Ivory Coast and Ghana, and both countries have been seeing rough weather lately, which has boosted prices of cocoa.
After all, the Ivory Coast and Ghana combine to produce nearly 60% of the world’s supply of the crop, so any shifts in their weather can have a huge influence on prices. Particularly this is the case as both nations are in the same region of the world, West Africa, so when concerns are hitting one nation they generally can impact the other too (see the full list of Top ETFs here).
Specifically though, the concerns are centering on the Daloa region of the Ivory Coast, as this area produces roughly 300,000 tons of cocoa a year. The area only got about .004 inches of rain—0.1 millimeters—from July 21st to July 31st, well below the long term average of 34 millimeters, according to a Bloomberg article.
With such dry conditions, the total output could be curtailed and it may push the Ivory Coast’s output of the key crop lower for the third year in a row. “Rainfall typically improves as we move into September,” said Sterling Smith, a futures specialist at Citigroup Inc. in Chicago in a Bloomberg article. “However, this will have to be closely monitored, and if they do not improve, production losses can be significant.”
The news helped to boost cocoa futures prices, sending the sweet commodity to its highest level in nearly a year. The report also helped to boost cocoa ETFs too, pushing these commodity products to the top of the charts for recent natural resource trading.
These products could actually be better ways for retail investors to take advantage of this situation, so long as they are betting on further price increases in this commodity. Currently investors have two exchange-traded ways to play the cocoa, both of which we have highlighted in greater detail below:
iPath Dow Jones- UBS Cocoa ETN (NIB - ETF report)
This Exchange-Traded Note gives investors exposure to the Dow Jones-UBS Cocoa Subindex Total Return, reflecting the returns that are potentially available through an investment in cocoa futures. The benchmark currently consists of one futures contract on the commodity, generally utilizing front month contracts (see ETFs vs. ETNs: What’s The Difference?).
The product has added about 8% in the past week, while it is up roughly 14% in the trailing one month time frame. Year-to-date, the ETF has also done reasonably well, adding roughly 9.3% in that time period.
iPath Pure Beta Cocoa ETN (CHOC - ETF report)
CHOC also provides investors with exposure to returns available through a cocoa futures investment, although it selects contracts using the Barclays Pure Beta Series 2 Methodology. This approach looks to mitigate roll yield and limit contango issues, possibly leading to outperformance if the correct contracts are selected.
This ETN is up roughly 7.4% in the past week, while it has added 13% in the trailing one month time period. From a year-to-date look, the note has seen gains of 8.8%, pretty good compared to losses approaching 11% for (DBA - ETF report), the most popular broad agricultural ETF on the market.
Cocoa has been a great addition to portfolios recently, as concerns over supplies have boosted prices in recent trading. If this situation continues, it could make cocoa a solid pick in the near term, especially if total production levels continue to fall in the most important growing region of the world for the crop (read Two Soft Commodity ETFs Holding Firm).
Just be careful with the aforementioned ETNs though, as trading volume remains light for both, so bid ask spreads could be wide. Still, either represent a solid way to get in on this solid story, and play one of the bright spots in the commodity ETF world as the end of summer fast approaches.
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