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What Pushed Up These Agricultural ETFs?

Finally, soft commodities are catching up with the hard commodities this year. Several hard commodities including precious metals have made a comeback this year, but soft commodities could not keep pace with them. A stronger dollar, weak global fundamentals that are impacting the demand profile and ample supplies marred agricultural commodity investing.

However, many agro-based commodities and the related ETFs have staged a recovery lately. A favorable demand-supply scenario is the major driver of this. Below, we highlight three agricultural ETFs that saw decent gains in the last one month (as of April 26, 2016) and see if the gains can last:

Cocoa

Cocoa prices have exhibited a wining trend lately due to supply concerns. Worries about lower yield in the mid-crop season in the key growing region of Ivory Coast led to this rise in prices. A long-drawn-out dry weather actually hit crop production.

In addition, the demand scenario is also shaping up with cocoa grinding – a key gauge of cocoa demand – in Asia rising 2.9% in the first quarter of 2016. The data came in better than analysts’ expectation of a 1% rise. The double tailwinds put the cocoa market in an upward trajectory and showered gains on cocoa ETFs like iPath Bloomberg Cocoa Subindex Total Return ETN (NIB) and iPath Pure Beta Cocoa ETN (CHOC).

Cotton

Global cotton prices took a beating earlier after talks about China – one of the key growing regions of cotton – preparing to sell some of its 11 million-metric-ton cotton hoard, which is a massive chunk and enough to roil global cotton prices, per Wall Street Journal. Notably, China accounts for about 60% of the world’s cotton inventory.

But the “delay in sales of its giant state cotton reserves” by China kept supplies at check and pushed up prices. Also, raw cotton deliveries to Indian mills have declined 12% this season, giving signs of lesser production.
This scenario has boosted cotton exchange-traded products like iPath Pure Beta Cotton ETN (CTNN) and iPath Bloomberg Cotton Subindex Total ReturnSM ETN (BAL).

Sugar

Sugar prices have also recovered lately on ‘global deficit’ concerns. As per sources, research agencies have predicted a shortfall in supplies globally for the current season that will end in September 2016 (read: Sugar ETFs Hit 52-Week Highs: Time for Sweet Returns?).

Going by a recent Wall Street Journal article, “Brazil, India and Thailand — three of the world’s top producers — are showing ongoing signs of production risk.” Inadequate moisture in these top growing counties spoiled output, especially in Asia. All these led to a reduced number of sugar-cane estimates that spurred deficit concerns and boosted the price (read: Can El Nino Boost Agricultural ETFs?).  

Teucrium Sugar Fund (CANE) and iPath Pure Beta Sugar ETN (SGAR) were the major beneficiaries of this trend.

Bottom Line

Having said this, we would like to note that we, at Zacks, are not positive on agricultural ETFs over the medium term. Though the products have gained lately, we expect the trend to lose momentum as the latest drivers are short-lived in nature (see all agricultural ETFs here).

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TEUCRM-SUGAR FD (CANE): ETF Research Reports
 
IPATH-PB SUGAR (SGAR): ETF Research Reports
 
IPATH-BB COTN (BAL): ETF Research Reports
 
IPATH-PB COTTON (CTNN): ETF Research Reports
 
IPATH-BB COCO (NIB): ETF Research Reports
 
IPATH-PB COCOA (CHOC): ETF Research Reports
 
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