Coffee ETFs had been on a tear last year having returned about 50% thanks mainly to adverse weather in the key producing country – Brazil. The ascent was so steep that the price of arabica coffee beans skyrocketed to a 32-month high in October 2014.
However, following this spike, coffee slipped to a bear market to close out the year on heavy showers in November. While many expected the commodity to see choppy trading this year, the rally in coffee futures refused to give up and has a high chance of making 2015 yet another memorable year for coffee beans.
Drought condition in Brazil – the main driver of the commodity’s incredible run-up last year – once again has taken center stage. Per Bloomberg, weather forecasts suggest that the harvest regions of Brazil – the world’s biggest producer and exporter of the commodity – might get around half the usual rainfall this and in the next month. The continued deficit of humidity in turn will hurt the crop and result in supply shortage.
As a result, the drumbeats of gains could be heard once again as coffee prices added about 12% in the week ended January 9, representing the 11-month best. Basically, after last year’s slide in inventories, this fresh spell of drought compounded concerns related to the crop.
As per a meteorologist, the northern parts of Brazil will remain ‘almost completely dry’ over the coming two weeks, while southern Minas Gerais and most of Sao Paulo might see light showers. This will pose a threat to about 40% of the crops as lack of humidity will ruin the vital flowering phase, per the source.
Might Be a Bet for 2015 Too
No doubt, weather concerns often bring short-term blips. Thus, following last month’s rains, several market participants put the risks over bean production at bay. Considering this, Commerzbank noted that “although the rains have now become more regular in Brazil – and pushed coffee prices down compared to October – the outlook for the 2015–16 harvest in Brazil is merely modest”.
On the other hand, a Rabobank analyst predicts the second year of production shortfall in arabica coffee and a fair robusta market to hold up coffee prices this year. Thanks to this relatively bullish price sentiment, iPath DJ-UBS Coffee TR Sub-Index (NYSE:JO) and iPath Pure Beta Coffee (NYSE:CAFE), the two ETNs tracking the commodity coffee, surged over 14% in the last five trading sessions.
Investors might be looking for ways to target the crop as a momentum play. While obtaining a futures account is definitely an option, some investors might choose an exchange-traded product route instead.
To do so, JO and CAFE are the only pure-play available options. 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:
JO in Focus
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. It has amassed about $63.8 million in assets so far. The product is up about 2.5% so far in 2015.
CAFE in Focus
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 about 10,000 shares change hands each day. This ETN is pretty much flat YTD.
Bottom Line
Though coffee is riding high presently, the ascent could lose momentum any time. Still, investors looking for some entry point in this volatile space should closely follow the weatherman first in Brazil, then in other growing nations including Indonesia and Vietnam. The pace of global recovery also matters a lot in playing with coffee futures as the former sets the course of coffee consumption.
Investors should also note that the relative strength index of the aforementioned ETFs is presently hovering around 50 indicating that the funds are far away from entering into an overbought territory. Thus, backed by positive drivers and armed by a Zacks ETF Rank #1 (Strong Buy), these two ETFs can brew some returns for investors in the near term.