Will The Ivory Coast Crisis Mean Sweet Returns For Commodity ETFs?

by on December 8, 2010 | ETFs Mentioned:

In recent months, a variety of commodities have surged to multi-year highs as strong emerging markets demand has combined with a weak dollar to propel virtually every natural resource sharply higher. As the year has gone on, supply disruptions have also played a significant role in the commodity price boom, as disastrous crops in both grains and soft commodities across the globe have contributed to some enormous price increases. Absent from the commodity equation has been political turmoil, which can often cut down supply routes in emerging markets that are prone to instability. But now a crisis appears to be brewing in the often volatile West Africa region, where a disputed election is threatening to wreck havoc on commodities markets around the world [see all the commodity ETFs here].

Election Turmoil

Thanks to a ongoing conflicts and ethnic tensions for much of the last decade, political turmoil hasn’t been hard to come by in the Ivory Coast; an attempted coup sent the troubled country into a near five year war that cost the lives of hundreds of soldiers and civilians. Events in the country appeared to finally be cooling down over the past few years as long awaited elections finally took place in late November of 2010. After nearly a five year wait, citizens went to the polls to elect a new president to lead the country of close to 21 million people in what many hoped would showcase the nation’s return to a peaceful, calm democracy.

Yet the election process has not gone as smoothly as many had hoped, as a contested election threatens to plunge the country back into another bloody civil war. Preliminarily results showed a loss for incumbent Laurent Gbagbo, who managed to garner just under 46% of the vote compared with 54.1% for challenger Alassane Ouattara according to the Independent Electoral Commission. However, the Constitutional Council immediately declared these results to be invalid and soon declared Gbagbo to be the winner, citing rampant fraud in the opposition’s stronghold in the North. That prompted the Constitutional Council to throw out votes in seven regions in that part of the country, which helped to swing the vote back to Gbagbo, who–according to the Council–was the winner of the Presidency [see Three Country ETFs Ripe With Risk].

Investor Impact

Thanks to the controversial nature of the decision, as well as the fact that a variety of international groups have declared their support for Ouattara, many are fearing a return to widespread hostilities across the nation in order to decide the future of the country. While the situation is obviously troubling for citizens of the nation, the impact on global markets may seem minimal, as most investors have little or no direct exposure to the Ivory Coast. But the country–much like the rest of West Africa–remains a crucial growing spot for cocoa, the crop from which chocolate is derived. In fact, close to 40% of all the world’s cocoa–roughly 1.3 million metric tons–is grown in the Ivory Coast, suggesting that if tensions escalate the price of cocoa could continue surging higher [see which ETFs offer exposure to any country in the world with our free Country Exposure Tool].

The turmoil has already begun to have a steep impact on prices; Cargill Inc., a cocoa shipper in the country, said the unrest is causing “challenges both in terms of delivery of beans and logistics on the ground,” news that helped to send prices up 5% last week up to about $3,065/metric ton on U.S. ICE Futures markets. “We continue to harvest the beans and stock them in our warehouse, but we haven’t sold anything since December 3rd,” said Koffi Kanga, secretary-general of a farmer’s cooperative in Gabiadji, a town in the southwest cocoa-growing region of San Pedro. “People are very worried about the political situation.” Some worry that this trend could continue if the situation remains tense, further adding to cocoa’s recent price increase. Political instability “could hold cocoa exports up for quite a few weeks or a few months,” said Eric Sivry, the head of the agriculture-options brokerage at Marex Financial Ltd. in London. “The market has the potential to shoot up.”

Although rising prices for the crop are likely to impact a number of industries, such as confectionery producers, the most direct impact will be felt in the iPath Dow Jones-UBS Cocoa ETN (NIB). The fund tracks a single-commodity sub-index currently consisting of one futures contract on the commodity of cocoa, which has its price surge in recent weeks as the crisis deepens in West Africa. Despite posting a 8.9% tumble year-to-date, NIB has bounced back in recent weeks, jumping by 9.9% over the past month and 12.1% in the past week alone. Should the crisis continue in the troubled nation, NIB could see its value continue to soar heading into 2011 [read Three Reasons Why The Cocoa ETF Is Leaving Investors Bitter].

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Disclosure: No positions at time of writing, photo is courtesy of David Monniaux.