Two Cheap Commodities Likely to Climb Higher

Includes: ADY, NIB, NIBC
by: Kevin McElroy

It’s tough not to get caught up in the whirlwind of excitement of record highs for gold and huge gains for silver. As of this writing, an ounce of gold is selling for more than ever. I do plan on buying more gold in the future, but as legendary commodity investor Jim Rogers says, “I don't like to buy things that have been going straight up.”

I think gold and silver have plenty of room to run, but while I accumulate capital and wait to buy physical gold and silver on the dips, I’m also scanning the horizon for commodities that are still cheap. (As an aside, both gold and silver stocks are on fire right now.)

As of now, the list of cheap commodities is pretty short. Almost every single commodity is selling for more than it was last year. Many are selling at or near five year highs. Almost all of them are significantly more expensive than they were ten years ago - or ever.

There are a handful of exceptions, and the two I’m going to talk about today are cocoa and milk. You’re not hearing about cocoa and milk in the mainstream media. But the same investment thesis that’s had me bullish for gold, silver, oil, corn, etc., has me bullish for milk and cocoa.

And while cocoa and milk will never be as flashy as other commodities, the fact remains that they are both cheaper than they were a year ago. And even better, the trends for both are starting to turn around. We don’t have to pick a bottom. Both commodities bottomed in the past few months. We’re in a clear uptrend:

Cocoa prices bottomed in September.

Milk prices bottomed in the beginning of August.

As you’d expect, prices for both of these commodities are somewhat constrained by the price of oil. The reason is simple: as shipping gets more expensive, these commodities get more expensive to deliver to market.

I think we can reasonably anticipate higher prices for both of these commodities. People aren’t going to stop drinking chocolate milk anytime soon.

In order to take advantage of the trend in these still-cheap commodities, I’ve found two investments that have tracked well with price movement for each respective commodity.

For cocoa, I recommend taking a look at the iPath DJ-UBS Cocoa TR Sub-Index ETN (NYSE: NIB). This exchange traded note (similar to an ETF) tracks the price of unleveraged investments in cocoa futures contracts.

More importantly, it’s shown an ability to sufficiently and effectively move in tandem with prices of cocoa. In other words, if cocoa prices rise 66% (as they did between November 2008 and January 2010) this ETN posts similar gains:

That’s pretty impressive. You might remember my long screeds where I criticized another exchange traded product that’s never kept pace with its underlying commodity: NYSE: UNG.

As cocoa prices continue to rise, this ETN should track pretty closely. That’s because cocoa (unlike natural gas) has relatively inexpensive storage costs. So this ETN doesn’t lose too much steam every month as it rolls into the next months’ contract.

If you like the trend for cocoa, then I’d recommend taking a closer look at this ETN.

As for milk, I’ve found a much more speculative opportunity. It’s a Chinese powdered milk manufacturer: Feihe International, Inc (NYSE: ADY) - formerly known as American Dairy Inc.

For those of you who haven’t clicked away to read about something more palatable - please hear me out. Powdered milk prices are historically cheap. That’s not going to last. And this company is already in a sustained uptrend.

This company currently has no trailing PE - and that’s because they’ve had no earnings. In part, that’s because of lower milk prices. From their most recent SEC filing:

Revenue decreased 14.2% to $194.8 million in the nine months ended September 30, 2010 from $227.1 million in the same period of 2009.

Higher milk prices should boost this company back towards profitability.

Do your own research into this company to see if it’s right for you, but I think you can safely buy shares under $15. That’s been a level of resistance for this stock for the past four months.

Disclosure: None