Like so many commodities exchange traded products, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) has struggled this year, shedding more than 6% over the past six months. However, coffee futures and JO have stormed back in recent weeks, prompting calls that coffee could be among the more bullish plays in the commodities space.
If the last El Niño is any indication, nonfuel commodity prices could rise in the months ahead. According to the International Monetary Fund, nonfuel commodity prices jumped an average 5.3% in the 12 months following the announcement of an El Niño event as the threat of lower production brought on by inhospitable conditions weighed on prices.
Below-average rainfall in coffee-growing Vietnam, Indonesia and Central America could lower crop yield expectations. Warm weather could reduce the risk of frost in Brazil, the largest coffee producer in the world, and could diminish crop output as well. [El Niño Commodity ETF Rally?]
However as 2015 enters the final quarter of the year, we are starting to see some bullish movement for Coffee prices. Dry conditions are being cited by analysts for the recent rebound in Coffee prices, as several key Coffee growing regions, most notability Brazil, are experiencing less than ideal weather conditions. In addition, low Coffee prices the past few years have cut into producer’s profits and, in turn, have forced many Coffee growers to forgo or reduce investment in fertilizers and maintenance, which could have a meaningful effect on production in the coming seasons,” according to Options Express.<
Since coffee beans are priced in U.S. dollars, Brazilian farmers are selling more abroad to capitalize off the strong U.S. dollar and weak real currency. Brazil is the largest exporter of coffee beans. According to the International Coffee Organization, world exports were at a record 111.7 million bags last year, with Brazilian shipments rising 15% to 36.3 million. [Bad News for Brazil ETFs]
Looking at the weekly continuation chart for Coffee futures going back to 2011, we note what might be a double-bottom formation, as the lows made back in September of this year could be a failed test of the major lows made back in November 2013. Prices are currently above the 20-week moving average (MA) but remain below the 200-day MA which is currently near the 155.00 price area. The 14-week RSI has turned neutral with a current reading of 53.30. 113.35 is seen as support for the front-month future, with resistance seen at 147.35,” adds Options Express.
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
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.