Coffee-related exchange traded notes are testing their short-term trend line Monday, bouncing higher on fears that the previous Brazilian drought has irreparably damaged crops and on concerns of dry weather in Central America.
On Monday, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) surged 5.4% while the iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) jumped 5.6%, and both ETNs are now trading back above their 50-day simple moving averages. Nevertheless, JO declined 30.2% and CAFE decreased 29.2% year-to-date.
COMEX Coffee futures were up 4.5% Monday, trading around $1.335 per pound.
Coffee bears have grown more cautious over the past week on negative reports on the long-term effects of last year’s severe Brazilian drought, which has lead to smaller-than-normal bean sizes, according to the Financial Times. [Coffee ETNs Could Perk Up On Persisting Crop Damage]
“Some recent domestic reports have reiterated that the crop could still be feeling the effect of last year’s drought,” the International Coffee Organization, said in a note. “This could potentially result in a smaller bean size, which would reduce overall output.”
Keith Flury, head of coffee research at Volcafe, also pointed out that dry conditions across Central America also triggered additional buying. Central American arabica production was rebounding after leaf rust fungus cut supply, but it remained below its 2011 to 2012 levels.
Moreover, Lionel de Roland-Phillips of South African coffee traders I & M Smith cautioned there were predictions among some coffee mills that certain arabica beans could suffer from “a tight supply for the next 12 months and into the next 2016 crop.”
Consequently, the ICO warned that the tight inventory levels has left the market “highly susceptible” to price volatility, as witnessed on Monday.
“While the coffee market seems to have no immediate supply concerns, it must be reiterated that stock levels in most producing countries are waning,” the ICO said, according to agrimoney. “”While there is a moderate buffer in importing country warehouses, this may not be sufficient to cover any significant negative shock to production. This could leave the market highly susceptible to a rapid surge in prices… if production fails to meet expectations.”
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
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Max Chen contributed to this article.