The great commodity bear market continues to endure with many long broad-market commodities exchange-traded products encountering their fifth consecutive year of price declines. This year alone, the ETFS All Commodities ETC (AIGC LN), which tracks the Bloomberg Commodity Index, is down 13.9% as of 14 August, having fallen 45.5% over four years. Amid the gloom, however, plenty of profits can still be had on the long side, with buying opportunities often driven by commodity-specific issues such as supply concerns. Two commodities which have bucked the downward trend recently are coffee and cotton, with ETPs linked to these softs enjoying impressive rallies.
Cotton ETPs rallied last week as new field surveys indicated lower expected yields in the US.
Coffee
ETFS Coffee ETC (COFF) made significant gains over the course of last week, closing up 7.2% at the end of trade on Friday 14 August. Investors in the leveraged version of this product, the ETFS Daily Leveraged Cocoa ETC (LCOC), would have enjoyed returns of approximately twice this.
The rise has been attributed to the effects of last year’s Brazilian drought which have reduced yields due to smaller-than-expected bean size. The National Coffee Council of Brazil has forecast a supply of 40 million bags of coffee this year, a drop in yield of 20% compared to previous industry expectations of 50 million.
As Brazil currently accounts for one-third of the world’s supply of coffee, poor yields in the country have a major effect on the world market. Furthermore, dry conditions across South America have raised concerns over future production levels from other exporting nations such as Colombia, which currently owns 5% of the global market share for coffee.
ETPs tracking coffee futures have enjoyed past rallies on the back of previous supply concerns. This was notable in early 2011 when torrential rains led to shortages in Colombia leading to a 21% gain for ETFS Coffee between January and April 2011. Similarly, a drought in Brazil caused the ETC to soar by 80% between January and April 2014.
ETFS Coffee tracks the Bloomberg Coffee Sub-index, an index tracking the return on coffee futures contracts that are rolled continuously on a pre-determined rolling schedule. The product trades in US dollars on the London Stock Exchange and in euros on the Borsa Italiana and the Deutsche Borse. The total expense ratio is 0.49%.
Cotton
ETFS Cotton ETC (COTN) also secured decent gains last week, closing up 6.4%. Once again, changes to the supply side of the cotton market have driven the price move. Recent surveys of cotton fields in the US have revealed reduced planting areas and higher abandonment. Adding to supply woes, yields for planted areas are predicted to be at four-year lows of 795 pounds per acre.
The US Department of Agriculture (USDA) has reduced their domestic cotton harvest levels this year by 1.42 million bales, down to 13.08 million bales – a drop of 19.9% year-on-year.
Furthermore, the USDA have also revised their global supply forecast downwards by 2.95 million bales to 105.2 million bales, citing “extreme heat” in key producing nations. “In addition to the US reduction, production is lowered 1.0 million bales in China based on lower reported area and extreme heat in Xinjian, and 0.5 million bales in India based on lower than expected plantings to date,” said the USDA.
ETFS Cotton (COTN) provides investors with exposure to the Bloomberg Cotton Sub-index. This index tracks the return on cotton futures contracts that are rolled continuously on a pre-determined rolling schedule. The product trades in US dollars on the London Stock Exchange and in euros on the Borsa Italiana and the Deutsche Borse. The total expense ratio is 0.49%.