Coffee ETFs Surge On Supply Concerns [Barclays Bank Plc]

October 8, 2014 4:35pm NYSE:CAFE NYSE:JO

coffeeA host of commodities ranging from agricultural to energy products to industrial metals have been facing pricing threats from a rising dollar. However, some commodities have been witnessing an opposite trend thanks to the demand


-supply imbalance. Coffee is one such commodity.

Initially, coffee made a remarkable comeback after a steep fall last year. Supply glut, muted demand and investors’ appetite for stock markets over commodities resulted in a 20% decline in the price of the commodity last year just to see about 75% price gain so far this year. Extreme weather conditions in the top growing region – Brazil – caused supply shortages in Q1 and pushed the prices higher.

Though the rally in coffee prices, which started off in early 2014, began to buck the trend from mid March on an easing drought condition in Brazil, the commodity again caught investors’ attention from August on spreads of coffee leaf rust, a long-drawn-out drought and high temperatures in major Arabica producing areas which spoilt the crop.

The situation has become so acute that Arabica-coffee futures hit the highest level in five months. Bloomberg noted that a crop forecaster at Somar Meteorologia pointed at the continued deficit of humidity which will harm the crop. The vital flowering phase is coming up but the dry patch seen for two weeks this month is threatening the coffee cropping season that would start next May, if we are to go by a Bloomberg report.

To add to this, consumption is rising at a swift pace in major producing nations like Brazil, Vietnam and Colombia along with its already widespread use in First-World nations. On August 1, the International Coffee Organization predicted that these two forces will cause a worldwide output shortfall to an extent of 10 million bags this season, also as noted by Bloomberg.

Price Impact 

Bloomberg further specified that Brazilian farmers have sold 44% of the crop by August 31, against 32% recorded in the year-ago period which will lead to a supply crunch. Shipments from Honduras, the main cultivator and exporter in Central America, declined 3.5% year over year.  Thanks to this factor, Dow Jones-UBS Coffee ETN (NYSEARCA:JO) and Pure Beta Coffee ETN (NYSEARCA:CAFE), the two ETFs tracking the commodity coffee surged more than 10% last week.

Some investors might be looking at a way to target the crop as a momentum play. While futures are definitely an option, some investors might want to take an exchange-traded product route instead.

To do so, JO and CAFE are the only pure-play options available currently. Either of these products could be an interesting choice for investors seeking to brew some returns from coffee, assuming it will sustain its new found momentum:

iPath Dow Jones UBS Coffee ETN (NYSEARCA:JO)

The most popular option in the coffee market, this ETN holds front month coffee futures for exposure to the commodity. The note charges investors 75 basis points a year in fees, and looks to follow the Dow Jones-UBS Coffee Index.

The product usually sees volume of about 100,000 shares a day. The product has amassed about $100 million in assets so far. The product was up about 11.9% last week and has increased 79.8% in the year-to-date frame (read: 3 Excellent ETFs to Play the Dollar Surge).

iPath Pure Beta Coffee ETN (NYSEARCA:CAFE)

This ‘Pure Beta’ ETN adopts a slightly ‘active’ approach. The product charges investors 75 basis points a year in fees, and looks to select the futures contract that best mitigates the impact of roll yield on the underlying investment.

This product is still overlooked by investors, as it has just about $8 million in AUM, while more than the 10,000 shares change hands each day. Its price moved higher by nearly 10.8% last week. On a year-to-date basis, the product has returned about 73%.

Bottom Line

Though coffee is riding high presently, we don’t expect the return to be as high as it was seen in Q1. One of the major causes for this is the four-year high  U.S. dollar against a set of currencies that marred the appeal for the overall commodity investing to some extent (read: Emerging Market ETFs in Trouble on Stronger Dollar?).

Notably, a weaker Brazilian currency real allows exporting countries to sell more which in turn increases the availability in the market but at the same time creates pressure on prices. However, one can overlook such worries as of now and concentrate on the basic demand-supply imbalance that will keep coffee prices on a solid footing in the short term.

This article is brought to you courtesy of Zacks.


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