Coffee has made an impressive comeback after a steep fall last
year. A supply glut, uneven demand and investors' appetite for
stock markets over commodities resulted in a 20% decline in the
price of the commodity last year. This was, in fact, the third year
of decline in a row, with the commodity plunging about
in the time period.
Most investors thought that the trend would spill over into 2014
thanks to higher inventories which were thought to hit the 5-year
high at June 2014 and the sluggish currency of Brazil - the world's
biggest producer and exporter of the commodity (read:
Slump in Coffee ETF Continues
However, proving many investors and analysts wrong, Coffee prices
were on a tear since the start of 2014 due to inclement weather in
Brazil which put a lid on production. Coffee prices as measured by
the ICE futures contract shot up
to $1.78 a pound in the first quarter of this year. The worst
drought in Brazil sparked fears of shrinking supplies.
This sudden supply crunch situation made coffee exchange traded
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
iPath Pure Beta Coffee ETN (
which were the top performers in the first quarter of 2014.
JO and CAFE gave investors great returns of about 60% and
56%, respectively (read:
Coffee ETFs Soar on Brazil Drought Concerns
How About Coffee in Q2?
The enormous rally, however, continued until the middle of March
which compelled many to believe that coffee is finally nearing a
pull back. Drought condition in Brazil - the main driver of
coffee's incredible run-up last quarter - is easing now. Building
hopes for rainfall are putting pressure on
. In the last 10-day period, JO and CAFE lost about 9% and 8%
(as of April 2, 2014).
Despite a 10% drop in Brazil's production this year,
research firm Society Generale
is still forecasting a coffee-supply surplus with production likely
to surpass demand by 1.5 million bags. Several analysts share the
view as they still see plenty of untapped supplies to meet future
Don't Be Fooled by the Coffee ETF's Surge
However, hopes have still not died for coffee as
a coffee market analyst
believes that production is less likely to return to the historic
high level as too much rain in Indonesia has ruined most of its
Also, the world's highest Robusta coffee producer, Vietnam, saw the
driest three months in a decade. Though April marks the start of
the rainy season, it is expected to be drier than usual, resulting
in a supply shortfall.
Coming to Arabica variety - the one Brazil is famous for - supply
is highly dependent on weather. One analyst believes that coffee
prices could rise to $3 a pound if April is drier than normal or if
the crop flowers prematurely. Clearly heightened volatility is due
for the beans and could deal a blow to low-income or cautious
Last month, another
that Brazil's output may slump to as low as 40 million bags from
47.7 million this season. There other drivers in place as well. The
leaf rust disease lowered production yields in the last two years
in Central America, adding to further concerns. Yet another analyst
stated that global demand might supersede production by 6.5 million
bags, compared with a surplus of 4.3 million a year earlier.
Another reason that could help Brazilian coffee price is the
strengthening of the currency, the real. The ETF covering the
Brazilian currency -
WisdomTree Brazilian Real Fund (
- gained about 6.65% this year recovering part of last year's
Notably, a weaker currency allows exporting countries to sell
higher which in turn increases availability in the market but at
the same time create pressure on prices. Should the real hold
steady in the near term, coffee prices will gain some footing.
Having said this, we would like to note that investing in coffee in
the days ahead needs a high risk appetite, if any investor is at
all bullish on its future course and would like to play the recent
subdued status as a buying opportunity.
While futures are definitely an option, some investors might want
to take an exchange-traded product route by putting their dollars
into JO or CAFE. Both the exchange traded products gained 3.24% and
3.20% in the past week but lost 5.62% and 4.84% in the past month
Breakfast Turning Dearer: 3 ETFs to Pick
Both the funds have a Zacks ETF Rank of 3 (Hold). Investors should
also note that the relative strength index of the duo is presently
hovering around 43-44 indicating that the funds have slipped almost
into the oversold territory.
This gives another cue to make some profits out of the funds, if
weather in Brazil fails to spur optimism. Thus, investors
seeking to earn some dollars from this volatile corner should
closely follow the weatherman first in Brazil, and then in
Indonesia and Vietnam, for clues on Coffee's future.
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WISDMTR-BRZ RL (BZF): ETF Research Reports
IPATH-PB COFFEE (CAFE): ETF Research Reports
IPATH-DJ-A COFE (JO): ETF Research Reports
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