Probably every investor knows that the worst performing commodity in 2014 was Brent which lost 48.08% of its value. However, what many investors do not know is that the best performing commodity last year was coffee which returned 37.74%. The reason was that Brazil (which is the world’s biggest producer of coffee) suffered a severe drought which threatened this year's crop. Subsequently traders drove the price of coffee higher in the expectation of a shortage.

Investors are now interested to know which commodity could generate attractive returns in 2015 now that that a potential shortage in coffee is priced in and the oil price is expected to remain in bear market territory, at least for the short term. In my opinion, cocoa (which returned 6.23% to investors in 2014) has a good chance of being one of the top performers this year due to a shortage in supply which cannot keep up with the increase in demand.

The increase in demand is a result of rising incomes in emerging markets like India and China, combined with an anticipated economic recovery in the developed world. This has led to industry forecasts of a 30% growth in demand to more than 4.5 million tonnes by 2020. This should be good news for farmers and businesses alike.

The shortage in supply is due to the fact that 90% of the world’s cocoa supply comes from small scale farmers in developing countries. As prices of food and other costs rise, the failure to capture sufficient value from their crop means that many cocoa farmers are abandoning the industry. Many of their children see no future in cocoa and are switching to more profitable rubber production or heading for the cities in the hope of finding a better livelihood.

The cocoa supply chain is undergoing a gradual but significant transformation. Unless urgent action is taken, Mars Chocolate fears demand could outstrip supply by more than 1m metric tons by 2020. Meanwhile, an ever-louder call for transparency in production is increasing scrutiny of the industry.

To make cocoa farming more profitable, farmers need to produce more cocoa. Average productivity increases when entrepreneurial farmers are trained to use inputs such as fertilizers and better cocoa varieties. Corporate investments in training and distribution networks for fertilizer and seedlings play a crucial role in helping farmers become more prosperous and in safeguarding manufacturers’ reputations. Mars, Ferrero and Hershey have invested in such programs, while Mondelez has pledged US$400m over the next decade to help growers. A quarter of that will be invested in Ivory Coast, where it hopes to double the cocoa output of 75,000 farmers. It is estimated that manufacturers will invest US$800m in smallholder development over the next 10 years.

Factoring all this in performance, in December 2014, Cocoa returned 2.36% to investors and was the best performing commodity for the month. This was after bean deliveries to ports in the Ivory Coast came in 13% lower year-on-year. Cocoa was also supported by seasonal demand which is high throughout the Christmas period and Northern hemisphere winter.

An ETF worth looking into is the iPath Bloomberg Cocoa Total Return ETN (Ticker: NYSEARCA:NIB) which is an exchange traded-note issued in the USA. The Notes will provide investors with a cash payment at the scheduled maturity or early redemption based on the performance of the underlying index, the Bloomberg Cocoa Subindex Total Return. The one month, Year-to-date, 1-year and 3-year return on the ETN were 1.35%, 1.00%, 5.54% and 7.34% respectively.   

Disclaimer:

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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