ETF Update: Cocoa Prices, ETFs and Speculation

| About: iPath Dow (NIB)

Cocoa Shortage Could Be Sweet for Cocoa ETN

Rising food prices have been a boon to commodities ETFs this year. Corn, wheat, soybeans, sugar, you name it - it's getting pricier by the minute.

But...chocolate? Precious, precious chocolate that many of us consume by the pound?

Yes, indeed. The world's cocoa supply is threatened, reports Scott Jagow for Marketplace. Now, let's everybody stay calm - there's no reason to run to your local Sweet Shoppe and hoard the chocolate goods yet, unless you've got a craving that just can't be denied.

That's because government scientists and the candy industry are hard at work to make sure that you still get your M&Ms fix, since they might be the only thing keeping you from chewing your nails off as the price at the gas pump ticks higher and higher.

The cocoa tree is facing disease and drought, and lost crops have cost farmers about $700 million a year. Falling supply has doubled bean prices in many places.

The government to the rescue: scientists are sequencing the cocoa bean genome to produce more disease-resistant varieties of cacao. Mars Inc. will contribute $10 million to fund the project.

The newly-launched iPath Dow Jones-AIG Cocoa Total Return Sub-Index (NYSEARCA:NIB) is one way to capture the rise in cocoa prices, especially if drought and disease continue to be a factor.

Speculators, ETF Traders - No One Is Safe from Bogeyman Suspicions

The finger-pointing about who's to blame for the rising commodities prices is in full force, and ETFs are not immune from being fingered as a possible cause.

Market Club for iStockAnalyst ponders the current situation and what, if any, role ETFs have in it. In his opinion, commodity ETFs have contributed in two ways:

  1. By allowing casual investors to participate.
  2. By creating a new type of participant in the futures market: the tracker. There used to be just three: producers, users and speculators. The tracker's sole role is to mimic price movements, and the traditional players compete with trackers for shares of the same asset.

While these are interesting points, we can't really agree. Commodities futures trading has its roots going back hundreds of years, so the impact of something that's only been around for 15 years and is still not quite a mainstream investing tool is going to be mild, at best.

Also, while ETFs have made it easier for casual investors to get in, it's doubtful that the majority of them have the kind of resources to cause the price of oil and other commodities to hit record highs, unlike institutional investors.

Rick Newman for U.S. News & World Report takes on six myths about speculators and why they're not the Michael Myers of Wall Street:

  1. They're bad for the economy. Sure, they're out to make money by buying a commodity when they think the price may rise so they can sell it for a profit. But they also help sustain the market for buyers and sellers.
  2. They're all secretly communicating and conspiring. On the contrary, speculation is competitive, and there are thousands of them. They often don't even know who their fellow speculators are.
  3. They're super-rich. Yes, some are. But research shows that many of them are big pension and index funds investing on behalf of the average working person.
  4. The government knows who they are. While exchanges track the activities of their members, they could be a trader one day and a speculator the next.
  5. They're creating a bubble. Demand in growing Asian economies with a fixed supply is more responsible for pushing up prices.
  6. They should be banned. Instead, regulatory changes should be made, such as raising the "margin requirement" to 50% (instead of the current 10%).