production of coffee and sugar in Latin America’s largest economy.
According to BBC News, harsh storms in the nation dumped the equivalent of one month’s rainfall in just a few hours on Wednesday, sending mudslides ragging through towns, destroying homes, roads, and bridges, while taking out power and telephone lines. Worst of all, municipal offices in the Serrana region, just north of Rio de Janeiro, have reported that death tolls as a result of the mudslides have surpassed the 500 mark and continue to grow.
In addition to being a catastrophic event, this act of Mother Nature could have a major impact on global supply of coffee and sugar, two commodities that are currently witnessing increased demand. Brazil is the world’s leader in coffee production and is the largest per capita sugar producing nation in the world, and excessive rainfall and flooding could hurt crop production and the ability to harvest the crop.
There has already been concern that there is not enough coffee around the world to satisfy demand, as Brazil’s buffer supply has already started to deplete to make up a cumulative net deficit over the past twenty years. Furthermore, reserves held by private roasters are starting to dwindle down as well, as they are near record lows in terms of historical stock to usage ratios. Additionally, crops in Colombia and Africa have taken a hit due to severe weather conditions seen in 2010.
As for sugar, production was already declining in Brazil before the natural disaster. According to Unica, a sugar industry group, sugar output in Brazil’s largest producing region has declined by as much as 18 percent from a year earlier and production and was anticipating further headwinds in the near term future. Additionally, output and production in India, another major player in global sugar production, took a hit in 2010 due to severe weather and is expected to carry over into 2011.
At the end of the day, a tragic event is taking place in Brazil which could lead to global supply woes in two commodities that are already witnessing supply and demand imbalances.
Some ETFs that could be impacted include:
- iPath DJ-UBS Coffee TR Sub-Idx ETN (NYSE:JO), which is an unsecured, unsubordinated debt security that is a pure play on coffee futures
- iPath DJ-UBS Sugar TR Sub-Idx ETN (NYSE:SGG), which is an unsecured, unsubordinated debt security that is a pure play on sugar futures
- PowerShares DB Agriculture (NYSE:DBA), which allocates nearly 11.36% of its assets to sugar futures and 11.34% of its assets to coffee futures
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.