Investing in Commodity ETF's & ETN's
Understanding & Trading Commodity Exchange Traded Funds and NotesCommodity ETF's & ETN's
By: Richard E. Maseri
Jumping Java! The world's 2nd largest cash commodity, has arrived cleverly disguised as a Commodity ETN. Those who follow my research, trading and investments know that I am very, very bullish on coffee, that addictive bean that makes it's way down steep mountain terrain via jackasses and into your home and the neighborhood Starbucks (SBUX) which I am also very, bullish on is now neatly packaged as a Exchange Traded Note (ETN) an efficient alternative trading vehicle:
An Exchange-Traded Note (or ETN) is an investment vehicle that trades on regulated stock exchanges , much like stocks. An ETN holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of stock exchanges the trading day. Most ETN's & ETF's track an index, such as the NASDAQ, S&P 500 or Dow Jones. ETN's may be attractive as investments because of their low costs, tax efficiency, and stock-like features. Buying and selling commodity Exchange Traded Notes (ETN's) is as easy as buying and selling common stock and can be done through any licensed brokerage firm. Unlike traditional commodity futures contracts these commodity ETN's, are not subject to margin calls and/or taking physical delivery of said commodity.
Lets have a closer look at this relatively new commodity ETN (Ticker: JO) as a way to diversify and / or participate on future coffee price movements. But 1st I'd like to make my case for buying coffee, whether via a commodity futures contract, options or this commodity ETN.
For starters, coffee is highly addictive and it's users love it, that said, multiply all those existing cups times millions perhaps even billions of new empty cup holding consumers thanks to... you guessed it Starbucks! But where? China, yes China the land of tea sippers is slowly being hooked on and converted to coffee! Seismic fundamental changes are taking place worldwide as it relates to the "coffee experience" . Know this and profit!
The Starbucks Angle:
Starbucks Corporation purchases and roasts high-quality whole bean coffees and sells them along with fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections, and coffee-related equipments primarily through its company-operated retail stores. In addition to sales through its company-operated retail stores, Starbucks sells whole bean coffees through a specialty sales group and supermarkets. Additionally, Starbucks produces and sells bottled Frappuccino coffee drink and a line of premium ice creams through its joint venture partnerships and offers a line of innovative premium teas produced by its wholly owned subsidiary, Tazo Tea Company. The company's objective is to establish Starbucks as the most recognized and respected brand in the world.
Once a high flying Wall Street darling, Starbucks has recently rallied out of a recent slump on good volume and the stock's internal technical's are improving. CEO Howard Schultz and Starbucks have talked about slowing down the pace of new store openings in the United States and closing some of the existing poor-performing stores. Investors are also fretting about the threat from McDonalds. Yes, there is a bullish case to made for the fast food giant here. It has shown that it can successfully market premium coffee, scorching hot cups too! It has a large network of drive thrus (which should attract Starbucks' customers, the majority of which consume their coffee outside its stores) and most importantly, it has the ability to sell the product (i.e. frappuccinos, lattes) at a cheaper price. But McDonalds, no matter what it does, is not going to be able to replicate the Starbucks experience. But the one of the thing that's really holding back the stock, Starbucks hasn't shown that it can really penetrate the overseas markets and be a major player there.
That's all changing now with China in the mix, this bold venture was not engineered to produce a few sidewalk cafes in Paris, Budapest or Prague! But to quench the thirsty Chinese! I suspect that very soon they will be benefiting from this venture, with over 500+ stores in dozens of cities scattered across Mainland China, Taiwan, Hong Kong and Macau. This is no sleeping Godzilla, wake up and smell the coffee! While we are scaling back on luxury purchases, they are the ones lining up for the $4 iced vanilla lattes and loving it!
Hot temperatures in Brazil, world largest coffee producer, could impact the production and prices of coffee the balance of 2009 and beyond. Initial forecasts for 2009/10 indicate a relatively low world crop, mainly as a result of a reduction in output in Brazil.
The first estimate released by CONAB, the state agency responsible for agricultural estimates in Brazil,indicates a production level of between 36.9 and 38.8 million bags, comprising 26.9 to 28.3 million bags of Arabicas and 10 to 10.5 million bags of Robustas, according to International Coffee Organization (ICO). Additionally, rising temperatures will lead to a 10 percent reduction Brazil's arable land for coffee by 2020 and a one-third reduction by 2070? as the crop's suitable climate migrates into the Andean foothills of neighboring Argentina, an Associated Press report quoting according to a study Eduardo Assad of Brazil's agricultural research agency, Embrapa said. This climatic shift is also key as the fundamentals are changing.
Brazil's coffee plantations extend across 5.7 million acres (2.3 million hectares) and produce more than twice as much as the next-largest grower, Vietnam. Yes, Vietnam, Colombia has slipped to the # 3 spot! The original Juan Valdez must be rolling in his grave...
In the near term, concerns over the availability of Colombian and Central American coffees have provided increased support to the market. Looking ahead, with the fall in Brazilian production, world stocks will come under heavy pressure in late 2009 and beyond, since the level of stocks in producing countries is already at its lowest for many years.
When it's raining in Brazil... Buy JO!
iPath DJ-AIG Coffee ETN (AMEX: JO); Last 37.33 52 Week High / Low 49.79 / 32.40
The investment seeks to replicate, net of expenses, the Dow Jones-AIG 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 as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
Richard E. Maseri