Up 62% this year, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) is 2014’s top-performing non-leveraged exchange traded product. The iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) has not been a slouch, either, with a gain of nearly 60%.
While those year-to-date gains and recent weakness in those ETNs may imply further upside for coffee is limited, the opposite may prove to be true. Seasonal trends, which often prove rewarding with other commodities such as gold, could be the next catalyst to drive coffee futures and the aforementioned ETNs higher. [Seasonality Could Lift Gold ETNs]
Covering short positions in coffee in May and thinking about reversing course to bullish views is a seasonal trade that has worked with coffee in the past. This year, the bearish trade extended a bit as JO fell 27.1% from its April peak to its July trough seen on July 11. JO is up nearly 15% since then.
“Traders can look to enter a new long position on or about August 18 and hold this position until about September 5. The trade usually ends right around Labor Day, but coffee prices can continue to head higher as illustrated by the yellow shading in the one-year seasonal pattern below. This trade has worked 26 times in the last 40 years, for a success rate of 65.0%. After posting a gain every year from 1986 to 1997, this trade has had a spotty record of late, successful in just eight of the last 16 years,” writes Jeff Hirsch of the Stock Trader’s Almanac.
An ongoing draught in Brazil, the world’s largest producer of Arabica beans, has been a familiar catalyst for JO and CAFÉ this year. Last month, Cooparaiso, a cooperative of 3,200 growers in southwestern and southern Mina Gerais, diminished its forecast by 17% to 2.4 million bags, and Cocapec, which represents 2,100 growers in the Alta Mogiana region, said harvests will fall 10% year-over-year. [Another Rally for Coffee ETNs]
Adding to the potential upside for JO and CAFÉ, Hirsch says Brazil’s drought “conditions have not completely eased and production and quality are projected to suffer this year and possibly even beyond which should set a floor under coffee prices for some time to come.”
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.