After pulling back this month on an uptick in Brazilian exports, coffee futures and related exchange traded notes surged Thursday as an analyst warns of continued tight supply ahead.
The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) rose 5.3% Thursday, testing its 50-day simple moving average. The ETN has declined 10.7% over the past month, but it is still up 68.3% year-to-date.
ICE coffee futures jumped 6.4% Thursday, trading around $1.96 per pound.
Judith Ganes-Chase, a former analyst at Merrill Lynch and Shearson Lehman who runs her own analysis group, J Ganes Consulting, argued “it is definite” that 2015 output will decline because of the stunted growth in new vegetation required to support next year’s cherries, Agrimoney reports.
So far this year, many Brazilian growers and dealers used the recent rally coffee prices to unload beans stored in warehouses, with exports of unroasted coffee rising 15% this year through April year-over-year, reports Leslie Josephs for the Wall Street Journal.
Some argue that Brazilian inventories will be enough to support the markets going into next year. However, Ganes-Chase contends that current stocks are comprised of low quality beans.
“About 20% of Brazil’s crop is not of export quality anyway, so assuming that is represented in the stocks,” Ganes-Chase told Agrimoney. “What is left is usually the coffee that producers could not sell.”
Consequently, Brazil’s inventory of export-grade beans could rapidly decrease as a result of the decline in coffee beans harvested and a dip in the quality of beans, potentially leading up to another year of tight supplies. [Coffee ETNs Percolate as Storms Threaten Brazil Crops]
“People buying are expecting a certain level of coffee quality – they are not going to get it,” Ganes-Chase added.
Along with Brazil, the world’s largest coffee grower, low production in Indonesia will offset any large harvests in Vietnam. Additionally, Colombia, the second-largest grower of arabica beans, saw a decline in production last month, the first year-over-year dip since 2012.
According to the International Coffee Organization, the market could face a deficit where demand outstrips supply in the 2014-2015 crop year.
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
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