Exchange traded notes that track coffee bean prices remain this year’s best performing commodity asset. However, the fundamentals are shifting as rainfall relieves a drought stricken Brazil, the world’s largest coffee producer.
Year-to-date, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) and iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) have surged 37.8% and 37%, respectively. Nevertheless, the coffee market is now in a bear market after JO plummeted 29.5% and CAFE plunged 27.7% since their October highs
The coffee market has been weakening over the past two months as rains quenched the parched Brazilian landscape after the worst dry spell in eight decades, Bloomberg reports.
Ecom Agroindustrial Corp. now projects the 2015 coffee crop will be at least 25% larger than the National Coffee Council’s July forecast. Ecom and Exportadora de Cafe Guaxupe Ltda anticipate the May to October harvest will reach 50 million bags. In contrast, the National Coffee Council predicted in July that output would dip below 40 million bags.
While Brazil is looking at its first three-year decline in almost half a century, coffee supplies remain above demand for a fifth straight season, and Brazilian farmers are exporting more to the U.S. as a stronger U.S. dollar and weak Brazilian real have made exports much more lucrative.
Consequently, hedge funds have reduced their bullish bets on prices by 35% since mid-October.
“We are a bit more bearish on coffee now,” Paul Christopher, chief international strategist at Wells Fargo Advisors, said in the Bloomberg article, predicting that prices may drop 9.2% further by April to $1.5 per pound. “The November rainfall was pretty good, and we also have adequate global supplies.”