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Time to Buy Cocoa ETFs as El Nino Threatens Crop Production?

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El Nino and climate change are causing frequent extreme weather events, adversely affecting cocoa production. These events lead to hotter temperatures, altered rainfall patterns, and increased pest and disease pressure, all of which harm cocoa cultivation.

Cocoa prices have already surged to historic highs due to climate-related challenges. This price increase has significant implications for the cocoa industry and consumers. iPath Bloomberg Cocoa Subindex Total Return ETN (NIB - Free Report) rose 1.7% on Oct 10 and is up about 30% this year.

Current El Nino Outlook

According to the latest El Nino-Southern Oscillation Outlook, El Nino is predicted to persist until March 2024, with a 71% chance of intensification from November to January. This prolonged and intensified El Nino could have dire consequences for cocoa-producing regions, as quoted on CNBC.

Threat to Cocoa Producers

An intensified El Nino may significantly reduce arable land suitable for cocoa cultivation, posing a threat to both food security and the livelihoods of farmers, especially those in West African countries, which are most vulnerable to extreme weather changes.

West Africa, particularly Cote d’Ivoire and Ghana, is responsible for a substantial portion of global cocoa production. These regions are at high risk from climate change, which could lead to severe economic disruption and increased farm input costs for businesses.

Despite the mounting challenges, higher levels of rainfall in 2023 may provide some relief to cocoa farmers, although long-term climate concerns persist.

ETF In Focus

iPath Bloomberg Cocoa Subindex Total Return ETN (NIB - Free Report)

For investors seeking momentum, iPath Bloomberg Cocoa Subindex Total Return ETN (NIB - Free Report) is probably on radar. The fund just hit a 52-week high and is up 51.7% from its 52-week low price of $23.92/share.

The underlying Bloomberg Cocoa Subindex Total Return reflects the returns that are potentially available through an unleveraged investment in the futures contracts on cocoa. The product charges 70 bps in annual fees.

More Gains Ahead?

Fundamentals point toward more gains. The fund is in high momentum given a positive weighted alpha of 38.10.

(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)

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