ETF investors are starting to pour into coffee. After dripping
a whopping 30% this year, a fresh bull market in the commodity
could be brewing, a commodity expert says.
IPath DJ-UBS Coffee Subindex Total Return SM Index ETN (
) rose 0.5% Tuesday, after gapping up 2.6% Monday. A more thinly
traded note,iPath Pure Beta Coffee ETN (
) surged 0.8% Tuesday.
On the NYMEX, coffee for December delivery traded at $1.67 a
pound Tuesday. Coffee for July 2014 delivery traded at $1.90 a
pound, which suggests traders expect more scarcity in the
The rally Monday was mainly driven by short covering due to
fears Hurricane Isaac would disrupt shipments from South and
Central America into New Orleans, the earthquake in El Salvador
and traders closing out positions ahead of the Federal Reserve's
scheduled speech Friday, said Jack Scoville, vice president of
the PRICE Futures Group, a Chicago-based brokerage.
"Fed meetings excite people to get out of shorts and head to
the sidelines," he said.
Bull Market Brewing
Shawn Hackett, president of Hackett Financial Advisors in
Boynton Beach, Fla., sent out a special alert to his clients last
weekend recommending coffee as a buy. He projects coffee will
reach $2.50 a pound over the next 12 months and $4 a pound over
the next two years.
Heavy rains this summer in Brazil damaged Arabica coffee crops
and caused trees to bloom prematurely, hurting their ability to
flower and grow buds abundantly, Hackett wrote. As the world's
largest coffee producer, the South American country accounts for
about a third of all global supply. He expects Brazil to produce
45 million bags next year, 10 million fewer than this year.
"Also, the likelihood of El Nino-reduced Robusta crops in
Vietnam and Indonesia next year will further exacerbate this
impending supply squeeze," Hackett wrote. Commercial traders --
the so-called smart money -- have loaded up on coffee contracts.
Hackett says he hasn't seen them this bullish since 2003 and
"Both times preceded fantastic multiyear bull market moves,"
The dollar-denominated commodity has been rising like most
others, owing to the greenback's weakness on expectations of more
The biggest risk to buying commodities is a recession, which
would weaken demand. Bag counts from producers are "notoriously
unreliable," says Mark Garrigues, an independent commodities
trader. It's in the producers' best interest to keep supply data
In his 25 years trading coffee, he's noticed the market tends
to find new supply when nominal prices reach $2.75 to $3 a
Commodities markets suffer from "price contamination," in
which suppliers withhold shipments because prices have increased
since they signed the contract. There's always a risk that the
coffee won't make it to the port or get shipped on time,
JO has slumped 30% year to date and 45% in the past 12 months.
JO trades below both its 50- and 200-day moving averages, which
is very bearish.
So far it appears to be staging a countertrend rally in a
downtrend that started in May 2011. Its IBD
Accumulation-Distribution Rating declined from an A to C over the
past six weeks, which is bearish. Its Relative Strength Rating is
a very low 10 on a scale of 1 to 99.
As an ETN, JO is a debt note that tracks cocoa and coffee
futures prices synthetically. It doesn't own actual contracts in
the underlying commodity. Investors must trust the issuers to
deliver those returns, which can be affected by the issuer's
PowerShares DB Agriculture Fund (
) tracks 11 different commodities contracts, holds a 7.5%
weighting in coffee. It's up 3.5% year to date and down 12% in
the past 12 months.