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Can El Nino Boost Agricultural ETFs? - ETF News And Commentary

Zacks Equity Research

El Niño, a warm-water phenomenon that blows up off the Pacific coast of South America, often has a great impact on agricultural prices. El Nino causes weather disruptions in many regions around the world, including drought in some and flooding in others due to abnormal warming of the Pacific Ocean.

The world has stepped into an El Niño cycle this year after a long pause of about five years and might end up seeing an upturn in the commodity investing markets, especially agriculture. Experts pointed out that this year, El Nino is not only strong; it is likely to be relatively long-standing too. In countries like India, this adverse climate will likely persist through the rainy season, which is all important for agricultural production.

Australia’s Bureau of Meteorology also indicated that El Nino is going to impact the country’s weather in the latter half of the year while the National Weather Service projected that “there is an approximately 90% chance that El Niño will continue through Northern Hemisphere summer 2015, and a greater than 80% chance it will last through 2015.”

However, there is a good side of this bad weather condition. As per the source, in its previous nine years, El Niño led the S&P agricultural commodity index to soar about 24.4% on average while gains at the S&P 500 index were comparatively muted at 16.5% (read: Introductory Guide to Soft Commodity ETFs).

Investors should note that global soft commodities ETF investing remained under pressure in the last one year with the highest gains of 3.5% noticed in Pure Beta Livestock ETN (LSTK) while most products traded in red. Losses in some products crossed even the 40% mark. Higher production, favorable weather conditions and an ascent in the greenback weighed on the soft commodity investing.

In such a backdrop, El Nino might act as a tailwind to this investing arena. Below, we highlight a few agricultural exchange-traded products which have the potential to trounce the overall agro-based commodity space and offer investors some sweet returns off El Nino despite the broad-based commodity market gloom.

ETF Picks

The slate.com went on to explain that El Nino normally dries up India, Brazil and Indonesia. In particular, it is likely to hurt sugar and rice crops in India and wheat crops in Australia. Coffee and cocoa may also see supply disruptions (see all agricultural ETFs here).

Coffee ETNs

The drumbeats of gains could be heard from the coffee ETF space on expected dry weather in major coffee producing regions like Brazil, Vietnam and Indonesia. Notably, Vietnam is one of the largest growers of Robusta variety of coffee and is warned of a once in “a 100-year drought” due to El Nino, per Wall Street Daily.

In fact, coffee prices have been on fire recently with iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO) and iPath Pure Beta Coffee ETN (CAFE) returning close to 8% each in the last five trading session. Coffee remained the top-performing agricultural-commodities ETNs from the last one-week look (as of June 3, 2015) (read: Can Coffee ETFs Continue to Stimulate Robust Returns?).

Wheat ETF

Wheat prices might see a rise on unfavorable dry weather in eastern Australia. Australian east coast wheat futures for July delivery touched a four-month high recently, per agrimoney.com. Teucrium Wheat ETF (WEAT), a product that looks to reflect the futures contracts for wheat, was up over 4.4% in the last one month (as of June 3, 2015) and 3.4% in the last five trading sessions.

Livestock ETNs

Thanks to the possibility of higher feed costs, livestock prices may also be nudged up. E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC) was up over 3% in the last one month while it has added over 1.2% in the last one week (as of June 2, 2015).

Cocoa ETFs

Ghana and Ivory Coast are major growers of cocoa. Since these regions in Western Africa normally get perched on El Nino, cocoa output can also be affected. iPath Pure Beta Cocoa ETN (CHOC) and iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB) added over 9% in the last one month and about 1% each last week.

Cotton ETNs

India is one of the largest cotton cultivators and exporters of the world. The El Nino threat is lurking in the cotton-heavy areas of the western and the northern regions of India. iPath Pure Beta Cotton ETN (CTNN) gave positive returns of 0.7% in the last one week (as of June 2, 2015) though the product was down 2% in the last one month.

Bottom Line

Though as of now the impact of El Nino does not look alarming on agro-based products, investors might track the above-mentioned ETFs if weather conditions deteriorate in the days ahead.

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IPATH-PB LIVSTK (LSTK): ETF Research Reports
IPATH-BB COFE (JO): ETF Research Reports
E-TRC UBC LVSTK (UBC): ETF Research Reports
IPATH-PB COTTON (CTNN): ETF Research Reports
IPATH-PB GRAINS (WEET): ETF Research Reports
IPATH-PB COCOA (CHOC): ETF Research Reports
IPATH-BB COCO (NIB): ETF Research Reports
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