Dry weather in Brazil, the world’s largest coffee producer and exporter, has futures for commodity poised to extend the best rally in half a decade. That is proving to be excellent news for coffee exchange traded notes (ETNs).
The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) is higher by 7.5% Monday on volume that is already more than double the daily average while the iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ), the smaller of the two ETNs, is up 7% on volume that is about 40% above usual.
ICE coffee futures rose 4.3% Friday, trading around $125.2 per pound, prompting traders to speculate that the harsh weather conditions will persist into February and potentially cause crop losses, further dampening supply and pushing up coffee prices.
Consumers are already feeling the higher prices as they buy their morning jolt. For instance, Starbucks Corporation (NasdaqGS: SBUX) has fallen 8.3% since the start of the year. [Wake up and Smell the Coffee ETN]
Coffee has surged 21 percent in 2014, heading for the best start to a year since 1997, Bloomberg reported. The news agency notes global coffee output will outpace demand for the fourth straight season.
Latin American producers, such as Brazil and Colombia, primarily grow Arabica beans, a higher end coffee bean consumed by end users like Starbucks, the world’s largest coffeehouse chain. Vietnam is a major producer of robusta beans, but production there has fallen off in recent days due Tet Lunar New Year festivities.
As is the case with other commodities, China looms large when it comes to coffee.
“Consumption of coffee in China is expected to grow by an annual rate of 9% for the next five years. This is not only from China’s large population but it’s rising middle class, which is expected to grow to 630 million people from 230 million. Additionally, dry weather in Brazil has supported coffee returns this year. In the past 30 days, rain was as much as 50 percent below average, according to a US based weather group,” according to S&P Dow Jones Indices Vice President Jodie Gunzberg. [Commodities in the Year of the Horse]
For those that enjoy market indicators and effects, Gunzberg notes in 2002, the last time the Chinese zodiac was in the year of the horse as it is this year, coffee futures rose almost 11.5%.
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
ETF Trends editorial team contributed to this article.