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Cocoa ETFs Surge; Will the Uptrend Last?

Zacks Equity Research

Commodity trading has been rough this year on sluggish global demand, a rising greenback and supply glut. Yet, one commodity in the soft commodities space – cocoa – has recently reversed the downtrend and found a position in the list of top performers on inclement weather conditions in key producing regions.

 

This has showered gains on two cocoa ETFs – iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB) and iPath Pure Beta Cocoa ETN (CHOC) – which have added about 7.2% and 6.1% respectively in the last one month (as of September 11, 2015) (read: 2 Commodity ETFs Surging Double Digits in 1H).

 

Each of these is clearly outpacing the broad agricultural ETFs including PowerShares DB Agriculture Fund (DBA) and PowerShares DB Commodity Index Tracking Fund (DBC) which incurred losses in the last one month (down about 0.5% and 1.7%, respectively) (see all commodity ETFs here).

 

Behind the Surge

 

Dry weather in the key growing areas of West Africa is roiling next year’s harvest outlook, especially in Ghana, the second-largest cocoa grower in the world. As per a cocoa trading company, the West African nation received just one-fourth of normal rainfalls in August thus posing big risks to cocoa plantation.

 

However, the gains were not at all unexpected or sudden. Several market participants were mulling over a jump in cocoa prices this year on a protracted El Nino – a warm-water phenomenon that blows off the Pacific coast of South America and often has a great impact on agricultural prices.

 

Experts had pointed out that, El Nino this year is not only strong; it is likely to be relatively long-standing too.  Notably, Ghana and Ivory Coast, the two major growers of cocoa, normally get perched on El Nino, leading to cocoa supply concerns and the resultant rise in prices (read: Can El Nino Boost Agricultural ETFs?)

 

Per the International Cocoa Organization, adverse weather and the delayed use of fertilizers lowered the Ghana cocoa produce by 22%. Plus, Ivory Coast farmers are believed to have put aside their cocoa produce and checked it from reaching the market so that they can cash in on the expected surge in prices before the start of the fresh crop season from October. Rabobank has predicted a 56,000 MT deficit in cocoa in its August report for the period October 2015 to September 2016.


Can the Uptrend Last?


However, the research house also indicated that this uptrend is not here to stay. Prices will slip once the weather issues subside and the presidential election in one of the cocoa producing regions, Cote D’lvoire, passes smoothly in October.


Also, given the never-ending global growth worries and resurfacing deflationary concerns in the Euro zone, which is one of the key consuming regions, demand for cocoa will likely be muted. A data about cocoa grindings provided by Rabobank validates this apprehension as cocoa grinding in Europe was flat in the second quarter of 2015 while North America and Asia saw a decline of 8.6% and 12%, respectively.

 

Bottom Line

 

So, NIB and CHOC can be considered bets of the hour, but market dynamics should be closely monitored if anyone wishes to hold these for long. Both NIB and CHOC currently have a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

 

 

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IPATH-BB COCO (NIB): ETF Research Reports
 
IPATH-PB COCOA (CHOC): ETF Research Reports
 
PWRSH-DB AGRIC (DBA): ETF Research Reports
 
PWRSH-DB COMDTY (DBC): ETF Research Reports
 
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