Like so many commodities exchange traded products, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) has struggled this year, shedding nearly 14% over the past six months. The good news is that could make a morning cup of coffee a little less expensive.
For commodities investors, the bad news is that coffee’s slide shows no sign of abating and professional speculators are not waiting around for the commodity to rebound. On the other hand, a sharp change in weather conditions in the world’s major coffee-producing countries could catch coffee bears off-guard, leading to a rebound.
If the last El Niño is any indication, nonfuel commodity prices could rise in the months ahead. According to the International Monetary Fund, nonfuel commodity prices jumped an average 5.3% in the 12 months following the announcement of an El Niño event as the threat of lower production brought on by inhospitable conditions weighed on prices.
Below-average rainfall in coffee-growing Vietnam, Indonesia and Central America could lower crop yield expectations. Warm weather could reduce the risk of frost in Brazil, the largest coffee producer in the world, and could diminish crop output as well. [El Niño Commodity ETF Rally?]
“As favorable weather increases crop yields, declining currencies in producing countries are encouraging farmers to export supplies that fetch dollars in return. It’s all adding up to overwhelming supplies, and the U.S. Department of Agriculture is predicting that output will top use for a sixth straight year. Brazil’s harvest is poised to keep getting bigger next season, according to Rabobank International,” reports Marvin Perez for Bloomberg.