Three Commodities To Play A Possible Summer Shortage


Agricultural commodities floated to the top of the ETF leader board while the stock market lacked direction Thursday. Ag commodities' bear market of the past year may be on its last legs, investment strategists say, owing to poor weather for grains and crop disease for coffee.

IPath DJ-UBS Coffee ETN ( JO ) gapped up 2.11% to 31.54 -- a two-month high. Although it broke above the 50-day line last week, it trades deep below the 200-day line, which is bearish.

Excess global supplies sent JO down 25.43% in the past year and 2.5% year to date. Global production from all exporting countries rose 6.4% in the 2012-13 crop year while consumption in those countries ticked up 2%.

Earlier this week Brazil -- the world's largest coffee producer and exporter -- raised the minimum price for arabica coffee by 17% to increase farmers' income. This is the first time in four years the government has intervened; it could support prices further, says Jack Scoville, senior market analyst at the PRICE Futures Group in Chicago.

A new bull market in coffee is starting to emerge, owing to a massive crop disease on high-quality arabica coffee trees in Central America, says Shawn Hackett, president of Hackett Financial Advisors in Boynton Beach, Fla., who specializes in commodities.

The coffee fungus has destroyed a quarter of Central American crops and is the worst since 1976, prompting some countries to declare emergencies, the International Coffee Association reported. Production in Mexico and Central America for the crop year 2012-13 is estimated to have plunged 15.2% over the prior year to 17.2 million bags, according to ICA.

The brunt of the roya leaf rust damage will be experienced in autumn 2013 and winter 2014, Hackett wrote in his May newsletter.

"Also, given the likelihood of lower robusta production in Vietnam and Indonesia over the next crop cycle against a huge ongoing supply-demand deficit that has continued to draw down robusta certified stocks, expect an increasing willingness on behalf of roasters to switch to the midquality Brazilian Naturals as a logical and economical replacement," Hackett wrote.

In addition, speculators in the coffee futures market are shorting, or betting on falling prices, at record levels. They're usually wrong, and should prices tick up, they will have to close their positions by buying the commodity, thereby driving prices up.

Other technical indicators such as the "money flow indicator" and "deferred bull futures spreads" have triggered buy signals on the short- and long-term time frames, Hackett adds.

"Such dual buy signals usually occur at the very early stages of a new bull market move," he wrote.

Teucrium Wheat ( WEAT ) climbed 2.28% to 19.18.Teucrium Corn ( CORN ) popped 1.73% to 40.55.

IPath DJ-UBS Grains ETN ( JJG ) rose 1.99% to 50.70. It tracks corn, weighted at 43% of assets, soybeans, 36%, and wheat, 21%.

Prices are rising ahead of an anticipated shortfall in the U.S. Department of Agriculture's grain supply report due out Friday, says Scoville.

He expects grain prices to strengthen because of a drought in the fall, followed by little snowfall in the winter and freezes in the spring.

All three ETFs ' shorter-term moving price averages have crossed below longer-term averages, indicating strong downtrends.

For now, they appear to be staging a countertrend rally.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: CORN , JJG , JO , WEAT

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