The Surging Demand For Soft Commodities (BAL, JO)
Kevin Kerr: The world is growing, that’s a fact. Some estimates say that by 2050 we could have 10.5 billion mouths to feed, and many of those people will want even better food.
The staple grains such as corn, soybeans, wheat and rice have all surged in price in recent years. But beyond those basics other more specialized food commodities values have surged too, and I think they have much further to go.
The term “soft commodities” is used in many different ways, but it primarily describes commodities that are not hard commodities, for instance: Gold, copper, and silver. Usually soft commodities are foodstuffs, primarily coffee, cocoa, and sugar. Sometimes grains, cotton and orange juice are also referred to as soft commodities.
Once diets in places like China were mainly rice and fish; now with the explosion of the middle class in these countries demand for coffee, cocoa, and sugar is surging. This extra consumption has never been in the demand matrix for soft commodities before and is ratcheting up prices substantially.
The surging demand in China and India has pushed soft commodity prices higher.
In 2011 we’ve seen record coffee exports. There is still a shortage of high-grade arabica beans, and prices have topped $3 per pound …the highest since 1977. Another soft commodity, orange juice, was at a near four-year high in June, after the lowest supplies in a decade in 2010.
Cocoa has been somewhat of the exception in 2011 because of increased exports. However it’s likely to resume its uptrend by 2012 as those exports ease.
So now that I’ve explained why this is a great time to invest, let me show you …
How to Invest in Soft Commodities
In my opinion, the ideal situation would involve purchasing the commodity directly with commodity futures. But not many investors know how futures work. And just about all who give it a try, end up losing a bundle! Therefore, please consult an expert before embarking on trading futures.
Another idea is commodity mutual funds, but none exist that invests directly in the soft commodities. More often than not, they invest in commodity stocks.
A better option is commodity ETFs, which have a lower expense ratio than their mutual fund counterparts, invest in the commodity directly, and trade like an ordinary stock on the exchanges.
The only thing with commodity ETFs is that you have to be careful about exactly what the fund tracks. Certain commodity ETFs track a commodity index, others invest in short/long-term futures, while some seek to track the price of a particular commodity. So before you invest, learn how the ETF you’re considering plans to get a return.
Here are two you might check out …
iPath ETN DJ-UBS Cttn A (NYSE:BAL)
This ETN seeks to track the Dow Jones-UBS CottonTotal Return Sub-Index.
Looking at the chart below you can see an excellent correlation between cotton prices (black dots) and BAL (green line). This is one of the best tracking ETNs I have found.
BAL closely follows cotton futures contracts.
iPath ETN DJ-UBS Coffee (NYSE:JO)
The goal of this ETN is to replicate, net of expenses, the Dow Jones-UBS Coffee Total Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in coffee futures contracts.
JO is a very good way to track the price of coffee.
ETF options are actually what I like best because they offer you leverage on ETFs to play the soft commodities.
And ETF options give you an added bonus: Limited risk.
They’re the tool I use to help my Master Trader members seek gains in any major asset class in the world — energy, stocks, precious metals, commodities, bonds and even foreign currencies — no matter what event or trend is happening in the world!
Yours for resource profits,
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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