Thanks to emerging market weakness, a sturdy greenback, and
towering stock markets, all-inclusive commodities finished the year
2013 on a sour note. However, the new year brought some respite for
commodity investments, with some corners promising huge prospects.
Cocoa is among those high-potential commodities. Prices of cocoa
are hovering around the
level so far in 2014 on top of last year's gain of about 25%, while
the Dow Jones UBS commodity index fell 10% in 2013.
Behind the Bullishness in Cocoa
Surging Demand for Chocolate:
Growing worldwide demand along with a supply crunch is pushing up
cocoa prices and subsequently the funds focused on this soft
commodity. Since cocoa is the basis of chocolate, rapidly
growing chocolate consumption is aiding the demand for Cocoa. Per
Euromonitor, global chocolate confectionery sales will likely rise
6.3% to a record $117 billion this year.
Increased Asian Demand:
Global cocoa supplies are nearing the
longest production deficit
in more than five decades on increasing chocolate demand in Asia.
While Cocoa processing in Europe - the biggest consuming region -
has grown for three successive months to end the year 2013, the
demand for chocolate is also constantly building up in Asia
especially with China accounting for the extra demand in the
In fact, the nation has recorded a
in sales over the past 10 years. The growing purchasing power of
the middle-income population is driving Chinese consumption ahead
of European use (read:
China ETFs Jump on Government Reform Afterglow
Political unrest and inclement weather in major producing regions -
Ivory Coast and Ghana - are crippling cocoa supplies thus resulting
in failure to meet global demand. The presidential election due in
2015 in Ivory Coast might also cause some short-term political
If these were not enough, farmers in West Africa - the region
accounting for 70% of world output - are pushing hard to boost
cocoa production as yield prospect can be restricted by old trees
as per Bloomberg
. Especially, in Ghana - the second largest grower in the world -
aging trees that produce lesser beans account for 30% of total
plantation and new trees generally take three years to be
To add to the woes, the
Ghana Cocoa board
announced its plan (in August 2013) to curtail its subsidy program
by half on pesticides next season to cut costs in the face of
sagging cocoa prices. The plan took effect from October 1 pushing
up the prices for fertilizers. This has compelled framers to lower
the use of fertilizers which will likely damage as much as 40% of
the global crop annually as per the ICCO.
Bullish Analyst Recommendation on Price:
- a research organization on agricultural commodities - gave its
first forecast for the 2014/15 season in late December indicating a
third consecutive year for deficit. Due to this supply-demand
imbalance, prices of cocoa have been on a tear, with huge gains
seen in the crop.
This uptrend in Cocoa prices make cocoa exchange traded products a
lucrative destination for investors. And to do this, a look at the
top-ranked cocoa ETF could be a great idea especially based on our
Zacks ETF Ranking system (read:
Cocoa ETFs: The Safe Haven In Agricultural Commodities?
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box or asset class (Read:
Zacks ETF Rank Guide
). Our proprietary methodology also takes into account the risk
preferences of investors. ETFs are ranked on a scale of 1 (Strong
Buy) to 5 (Strong Sell) while they also receive one of the three
risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk
category. We assign each ETF one of the five ranks within each risk
bucket. Thus, the Zacks ETF Rank reflects the expected return of an
ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio
in the soft commodity equities space, we have taken a closer look
at the top ranked CHOC and NIB. Both members of the duo have Zacks
ETF Rank of 1 or 'Strong Buy' (see the full list of
) and both are detailed below:
iPath Pure Beta Cocoa ETN
This note looks to track the performance of the Barclays Cocoa Pure
Beta Total Return Index. Unlike many commodity indexes, this one
can roll into one of a number of futures contracts with varying
expiration dates, as selected using the Barclays Pure Beta Series 2
This approach might result in less contango. This can be an
important factor, as month-to-month shifts in contracts can eat
away returns during an unfavorable market situation. The fund is a
bit unpopular in the space as evident by its AUM of $8.0 million.
The product charges 75 bps in fees.
The ETN gained 29.23% over the last one-year period - the highest
among any other agriculture-based products.
iPath Dow Jones-UBS Cocoa Subindex Total Return ETN
This ETN seeks to match the performance of the Dow Jones-UBS Cocoa
Subindex Total Return. The index delivers returns through an
unleveraged investment in the futures contracts on cocoa and
currently consists of one futures contract. The product normally
utilizes front month contracts in order to achieve
all the agricultural ETFs here
The fund is also unpopular and has attracted just $42.5 million in
assets this year. The product charges 75 bps in fees per year and
trades in a small volume of nearly 14,500 shares on average daily
basis. This increases the trading cost in the form of a wide
The ETN added about 28% in the last one year.
We expect Cocoa to be the clear winner in agricultural commodities
space over the long haul. It is the only product in the
soft-commodity ETF world exhibiting consistency. Though sugar ETFs
also have a bullish outlook and favorable Zacks ETF Rank, the
return is not as lofty as Cocoa at present.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
IPATH-PB COCOA (CHOC): ETF Research Reports
IPATH-DJ-A COCO (NIB): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report