By Gulshan Malhotra
“iPath DJ-UBS Coffee Sub-index Total Return SM Index ETN” (hereafter “JO”) is an investment seeks to replicate, net of expenses, the Dow Jones-UBS Coffee Total Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in coffee future contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
The closing price for the stock of JO as on April 19, 2013 is $30.72. In this analysis, we are not considering just 52 Weeks’s history, but 5 year’s history as well. The purpose to consider 5 year’s history is to accommodate the lows and highs of the business cycle.
Stock Exchange Info
JO is listed on Dow Jones (NY) with ticker “JO”. It is an ETF (Exchange Traded Fund) which follows Dow Jones-UBS Coffee Total Return Sub-Index. Its category is Agriculture
Chart 1 : 5 Years Analysis
Chart 2 : 52 Weeks Analysis
If we look at the 52 week’s pricing trend, low is $28.82 and high is $46.01.The current price is towards the lower side based on 52 week’s price range. If we look at the 5 years pricing trend, the low is $28.82 and the high is $81.12, the current price is again towards the lower side based on 5 years price trend. This indicates that it is a good entry point. (See chart 1 and 2)
Table 1: High / Low Prices
Chart 3: Coffee production countries
Coffee is one of the most widely traded commodities in the world. There are two types of coffee plants Arabica and Robusta. 80% of the total world coffee production is Arabica and the balance 20% is Robusta. The caffeine content in Arabica beans is 0.4% – 1.6%, while Robusta beans have 1.7% – 4.0% of caffeine content . Since Robusta type contains high caffeine, it is used as a flavor.
Coffee is produced in over sixty countries. Many of these sixty countries are deeply dependent on coffee. This created a need to consolidate, structure and control the coffee business. So, the International Coffee Organization (ICO) was set up in London in 1963 with the help of the United Nations because of the great economic importance of coffee. The ICO’s mission is to strengthen the coffee sector and promote its sustainable expansion in a market-based environment for the betterment. Its Member Governments represent 97% of world coffee production and over 80% of world consumption. Brazil is the leader with producing 35% of the total world production of coffee. Brazil, Vietnam, Colombia and Indonesia combine together produce 74% of the total world production (chart 3). Europe, USA and Brazil are the big consumers of coffee. Europe consume 34%, USA consume 18% and Brazil consume 15% of the total coffee consumption.
Reason for fall / spike in the price of stock
Table 2: Coffee spot price
The main driver for JO is the coffee price. Coffee price, for 5 year high is $231.2, 5 years low is $107.7 and current is $131.4. If we assume that the normal spot price is the mean of high / low of 5 years, i.e., $169.5 and is normalized to current period, the current spot price is 29% lower than the normal price. This indicates that there is a potential for increase in the spot price. (See Table 2)
Note: Prices are based on average monthly price during the season which is Oct to Sep.
Chart 5: Coffee price trend
Further, if we see the five year price trend, the prices are in lowers range. When we draw liner line on the price the trend shows that the normal price is around $160.
If we evaluate from volatility point of view, current price is in the middle of the lower range and in entry zone (Chart 6).
Chart 6: Coffee spot price 5 years trend
Chart 7: Coffee total world production and price trend
When we see the price and production trend, there is no real relationship of price and production. Since coffee demand in last five years has increased exceptionally, there was a bumper extra ordinary harvest for 2012 which lead to 2013 prices of coffee, which is considered temporary in my opinion. Finally, all the indication is that the current price of coffee is lower than the real price of coffee.
Also, in the 1st quarter of 2013, there was a news that a bean-destroying fungus is increasing across another important coffee-growing region, Central America. Honduras, Guatemala and Costa Rica are all expecting substantial drops in coffee production due to the bug. And those drops possibly will be felt market-wide by October, when the next coffee season starts.
Average daily volume is 87.8k shares, which is equivalent to $2.6M based on the current price. This means that the deals that are equivalent to average $2.6M, complete in one day. The maximum level of $26k is suggested for the investment to keep the liquidity high.
Options Price Analysis
Valuation of the stock
Exchange Traded Fund (ETF) Info
Total Net Assets of the JO is $100M and Total Net Assets Value is $30.77. Actual Management Expenses Ratio is 0.75.
Risk / Opportunity
Risk vs. Opportunity ratio may be defined as the comparison between the strength of the opportunity and the risk involved in the investment. For JO, the opportunity is 8x of the risk based on 52 week’s analysis and 26x based on 5 year’s analysis. (See chart 1 & 2)
Price Earnings Ratio
Based on the above analysis, it is worth investing in JO. The value of the investment is less risky than the opportunity available.
Reference to the previous article “Analysis on Uranium one Inc. (UUU)” published on Dated Sep 11, 2012, there is a further development regarding the stock.
Uranium One Inc., (Uranium One) along with its subsidiaries, is engaged in the acquisition, exploration and development of properties for the production of uranium in Kazakhstan, the United States, Tanzania and Australia. Uranium One’s principal projects are the Akdala Mine, the South Inkai Mine, the Karatau Mine, the Akbastau Mine, the Zarechnoye Mine and the Kharasan Mine in Kazakhstan. The Company also operates the Honeymoon Project in Australia in a joint venture with Mitsui, and apart from operating the Mkuju River Project in Tanzania, it owns a 13.9% interest in the same.
The closing price for the stock of Uranium One Inc. as on Mar 21,, 2012 is $2.77.
Stock Exchange Info
Uranium One Inc. is listed in Toronto Stock Exchange with ticker UUU. It falls under sector Basic
and industry Precious Metal & Mineral.
Russia’s state uranium firm JSC Atomredmetzoloto (ARMZ) offered to have Uranium One Inc. private by offering $2.86 per share to the minority shareholders. This offer is 14% higher than the price CAD 2.51 which was quoted by the article under the reference date of Sep 12, 2012. ARMZ and its affiliates are the major shareholders and already own 51.4% of common shares issued. This buyout will cost ARMZ a total of $1.3B. If approved by court, this transaction is expected to come to an end by the second quarter of 2013 .This implies that the shareholders will get a cash of $2.86 for each share by end of Jun-2013.
The current stock price for UUU is $2.77 though the deal is for $2.86. The reason behind this difference is the 101 days remaining to receive the cash which equals the annual return of 11.7%.
In my view, ARMZ perceives great potential in investing in uranium rather than any other investment which obviously aligns with my article “Analysis on Uranium One Inc. (UUU). An exceptionally low spot price of Uranium is the primary reason for it’s expected future growth. At present, the demand is expected to grow because there is no substitute available for Uranium.
This was a good investment with a locked gain of 13.9% (annualized 17.5%). I still believe that Uranium is a good investment and I will keep an eye for some good entry point for any other uranium investment.
By Gulshan Malhotra
I have always fathomed how a Canadian feels about a major chunk of his income going into the hands of government in the form of taxes. Tax vs Services are not efficiently managed by the government. So, a common man’s plight while he is toiling hard to make both ends meet, and the frustration that he goes through knowing that a big portion will be gone in taxes, motivated me to explore this further and pen down something to share my findings through research. I kept only two type of taxes, Harmonised Sale Tax (HST) and Income Tax, under the scope of my research.
Canadian Pension Plan (CPP), Employment Insurance (EI) deduction and property tax is excluded from the calculation of average tax rate, since deduction for CPP, EI and property tax goes to the specific program which runs independently and have long term benefits. CPP is for pension after the retirement while EI is for unemployment allowance during the lay-off or for any other reason if a person loses his job. Property tax is used to provide facilities to the resident like school, police, roads etc.
Figure 1: Type of taxes
HST rate is 13%. Out of 13%, 5% goes to the Federal Govt. and 8% goes to provincial government.
Income Tax, also, has two components. One component goes to Federal Government while the other component goes to provincial government. Income Tax is charged according to the slabs of income under which an individual falls. Each slab has a different rate. The idea is higher the salary or income, higher the tax amount. If a person’s salary is $100, 000, his tax rate is 28% (see table 1 for detail calculation).
Following example will explain that how much is the average tax rate including HST and Income Tax.
Pooja Malhotra draws a salary of $100,000 annually and lives in Toronto, Ontario. The tax rate for her is 28% (see table 1 for detail calculation). The income tax rates shown in the table are based on CRA tax rate for the income for the year 2012. She wants to buy a television priced at $1,000. She wants to know how much from her salary of $100,000 will go in buying the television. Firstly, she needs $1,130 to give to the shopkeeper, since shopkeeper will charge list price plus HST of 13%,i.e., $1,000 + 13% of $1,000 = $1,130. Further, She needs to earn $1,560 to get cash in of $1,130 ($1,130 ÷ (100% – 28%) = $1,560). This implies that she needs to earn 156% of her monthly expenses. In other words, she gets the purchasing power of $65,000, if her earning is $100,000 (See table 1 for detailed calculation).
Table 1: Average Combined Tax Rate (HST + Income Tax)
Further, Pooja also paid $6,255 towards other taxes (CPP, EI and property taxes) (See table 2 for detail calculation).
Table 2: Calculation of other taxes
Canadian pays very high tax rate which is 56% of cash received. My research will continue to dig out answers for some further questions like
- How this rate is comparable to other country’s rate?
- How and how much Pooja Malhotra gets back in return from government towards services.
Stay tuned for the continuation of this article in part 2.