Cocoa ETFs Surge On Supply Worries - Commodity ETFs
11 1월 2012 - 6:17PM
Zacks
Thanks to weakness in emerging markets and dollar strength in
the final part of 2011, a variety of commodities finished the
tumultuous year on a sour note. While oil-heavy funds—such as
DBC—managed to avoid the worst of this due to tensions with Iran,
other products including those in the metals and softs sectors,
plunged on the final four months of the year with many losing more
than 10% of their value during the period. Soft commodities were
especially hurt by the broad slowdown fears in global markets and
particularly those tracking the often volatile cocoa market.
In this slice of the investing world, prices for the sweet
commodity fell from just over $3,000/metric ton to just over
2,200/metric ton at the end of the year, representing a massive
loss for the firm in just a fourth month time frame. While a strong
dollar was part of the reason for the slide, another huge
development was the return to some semblance of normalcy in Ivory
Coast, the world’s biggest grower of the crop. The country saw
turmoil at the beginning of the year but rebounded in the fourth
quarter, greatly increasing its exports of the crop and pushing
prices far lower heading into 2012. Yet, although the recent
performance has been weak—to say the least—other developments in
West Africa could spell good news for those looking to make a play
on the space.
West African Tensions
Nigeria, a nation in West Africa with a population approaching
170 million, is experiencing quite the rocky start to the year
thanks to a variety of political problems. Workers are now on
strike in protest of higher fuel costs-- which have doubled thanks
to a repeal of subsides-- while farmers are refusing to sell crops
thanks to a similar issue which has severely eaten into their
profits. Meanwhile, attacks on various churches and mosques around
the nation are being reported, with some even fearing a split of
the country could come about from the resulting riots and tensions
(read Forget WTI, Play Crude With This Oil ETF).
Beyond the potential humanitarian issues and fears of a civil
war, the country is also a major producer of both oil and cocoa.
While the oil market has brushed off the tensions so far, the cocoa
market has not, largely due to the country’s outsized role in the
production of the commodity. Currently, the nation is the fourth
biggest producer of the product making nearly 370,000 metric tons
out of the global supply of just over four million tons.
So although Nigeria isn’t the biggest producer of the valuable
crop, it does make up a sizable portion of supply and could be a
wildcard this year, especially with already tight supplies for the
in demand product. “Whenever you see a country being immobilized,
you run the risk of exports not moving at all,” Hector Galvan, a
senior commodities broker at RJO Futures in Chicago, said to
Bloomberg. “Nigeria is not Ivory Coast, but when all is said and
done, it’s one of the top producers.”
As a result, prices of cocoa which trade on the NYMEX have been
on a tear so far this week, adding nearly 17% in two days of
trading with more than 8% gains in each session. This figure
represents a huge reversal that could either be the start of an
uptrend in the cocoa market, or if Nigeria gets things under
control, an excellent entry point for shorts. Either way, the next
few weeks look to be an extremely volatile period for this corner
of the soft market and could produce big changes as we head into
the second half of the month (read Three Micro Cap ETFs To Play The
January Effect).
Cocoa ETNs
If investors are looking to make a play on the cocoa market,
futures are one of the few choices available. Yet, for those who
are looking to make an exchange-traded note play instead, there are
two options that could be worth a closer look in this uncertain
trading time in this soft commodity:
iPath Dow Jones-UBS Cocoa Total Return ETN (NIB)
The easiest way to achieve exposure to cocoa is with NIB which
tracks the Dow Jones-UBS Cocoa Subindex Total Return. This
benchmark tracks the performance of a single futures contract on
the commodity of cocoa, generally the front month contract. The
product is also collateralized with an investment in short-term
Treasury bills which should help to offset the fund’s 75 basis
point yearly fee (Can You Fight Inflation With This Real Return
ETF?).
In terms of volume, the fund trades just about 26,500 shares a
day but the volume has spiked in recent days thanks to more
investor interest. Obviously this isn’t the highest level of volume
for a commodity product, but it is by far the most for an ETF in
the cocoa category. For performance, the fund has gained over 12.3%
in the past five trading sessions, helping to cut into the
significant losses from 2011 which came in at -33.8%.
iPath Pure Beta Cocoa ETN (CHOC)
For a new way to play the cocoa market, investors should take a
look at CHOC instead. This product, also from iPath, seeks to use a
different way to achieve exposure to its underlying futures which
may help to cut down on contango. In this strategy, the fund
doesn’t just roll into the next month’s contract but instead can
roll into any number of contract expiration months in order to
achieve exposure. Hopefully, this strategy can cut down on contango
and push the fund to higher than expected returns (see Is USCI The
Best Commodity ETF?).
The main downside for the product, however, is its tiny trading
volume which some days barely registers past 1,000, if not outright
zero. Thanks to this, investors may find it hard to get in and out
of the product at the desired price. Nevertheless, the fund still
charges investors a yearly fee of 75 basis points just like NIB so
at least that part of the total cost picture is constant.
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